Victorian Auditor-General’s report
1 June 2011

Management of Major Road Projects 
Audit summary
Background
Over the past decade, Victoria has experienced rising urban road congestion and deteriorating public transport performance as its population and economy have grown. 
To meet these challenges, the Victorian Transport Plan was designed to transform the transport network through a $38 billion program of investments to address capacity constraints and improve performance. Half of this planned expenditure was for road projects. 
The Victorian Transport Plan has now been superseded and its component projects are under review. This audit is therefore timely because it examined how effectively VicRoads and the Linking Melbourne Authority (LMA) managed a sample of major road projects:
·	six of VicRoads major road projects, with capital costs that varied between $41 million for the Goulburn Valley Highway duplication, to $1.2 billion for the Western Ring Road upgrade
·	the Peninsula Link project, included in the Victorian Transport Plan with an expected cost of $750 million and subsequently developed and procured by LMA as a public private partnership.
For this audit, effective management means:
·	providing a sound understanding of projects’ costs, benefits and risks so government can decide if, and in what form, an investment should proceed
·	managing the risks to deliver the intended benefits on time and within budget
·	demonstrating that completed projects have achieved their intended outcomes and using this experience to better manage future projects.
Previous VAGO audits found weaknesses with the quality of information that agencies used to justify projects and their procurement, and how agencies measured project outcomes.
Conclusions
VicRoads and LMA have not been fully effective in developing the major road projects examined. Both agencies fell short of the standards required to reliably forecast traffic and estimate projects’ economic benefits when informing the decision to proceed.  LMA also had weaknesses in the way it had informed procurement decisions. 
Addressing these weaknesses is critical because decisions have been made without a complete understanding of the consequences.
Based on the projects reviewed, neither organisation has effectively measured all of the intended project outcomes, but both are working to do this for current and future projects.
Once decisions had been reached on projects and their procurement, VicRoads and LMA effectively monitored and managed their delivery. This was evident from their performance in delivering projects close to their planned time lines and costs.
Findings
Informing project decisions 
The strengths of both VicRoads and LMA’s project development are in their rigorous engineering assessment of options and their methodical approach in estimating costs and adjusting these for the delivery risks. 
The two major weaknesses were in the way VicRoads and LMA forecast traffic and estimated benefits for projects affecting congested parts of the road network. They did not adequately assess the traffic induced by these improvements, communicate the risks, or estimate the impact on the economic benefits. 
These shortcomings create a risk of overestimating the benefits and giving decision‑makers false confidence about the capacity of the project and the surrounding road network, to cope with future traffic. If these risks materialise then additional investment will be required to realise the benefits promised when justifying a project.
These weaknesses need to be addressed so that decision-makers can make a fully informed decision about whether to proceed with a project. 
Informing procurement decisions 
LMA followed the relevant Commonwealth and state guidelines in procuring Peninsula Link through a public private partnership (PPP).
However, VAGO cannot provide assurance about the reliability of the difference estimated between the costs of delivering the project through a PPP compared to a state-financed public sector comparator. Consequently, assurance cannot be provided that the project represents value‑for‑money.
LMA did not adequately test the assumptions underpinning its comparisons of the discounted costs of a state financed and managed project with a PPP because:
·	LMA assumed cost differentials based on national studies and did not make adjustments for the project’s low risk profile and Victoria’s performance in delivering similar projects using traditional procurement methods.
·	LMA did not test and communicate to decision-makers the sensitivity of the difference between the PPP and public sector comparator discounted costs to small changes in the PPP discount rate.
Measuring and improving performance 
In terms of measuring projects’ outcomes:
·	VicRoads had not done this adequately, but is acting prospectively to address this deficiency for current and future projects
·	LMA has included measures directly related to the freeway’s operation in the Peninsula Link contract, and is working on a plan to monitor the wider traffic impacts.
Recommendations
Number	Recommendation	Page	
	VicRoads should:		
1.	assess the significance of induced traffic for all major road projects and take account of this when forecasting traffic and estimating the economic benefits	15	
2.	include sufficient information in its business cases on the reliability of the traffic impacts and economic benefits	15	
3.	apply minimum business case requirements when 
fast-tracking a major road project	15	
4.	review the lessons from all major projects on a scale commensurate with the size and complexity of the project and the likely benefits of the review	15	
5.	incorporate the adequate measurement of project outcomes in its project management processes.	15	
	Linking Melbourne Authority should:		
6.	improve the quality assurance of the transport modelling and the calculation of the economic benefits 	30	
7.	improve the quality assurance applied in estimating and revising the public sector comparator cost	30	
8.	better inform decision-makers about the sensitivity of the comparison of the PPP and public sector comparator costs to small changes in the PPP discount rate	30	
9.	document a plan to measure outcomes as part of the project development.	30	

Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report was provided to the Department of Treasury and Finance, VicRoads and Linking Melbourne Authority with a request for comments or submissions.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) comments and submissions, however, are included in Appendix A.