4BC interview on hospital cost blowout – Govts need to crunch numbers properly before spending decisions

I spoke to Ben Davis from 4BC’s Drive program yesterday afternoon about the Auditor-General’s report on the Beattie Government’s decision in 2006 to build three new hospitals, including the Lady Cilento Children’s Hospital and new hospitals on the Gold and Sunshine Coasts. It turns out that the hospitals ended up costing around $5 billion when completed, compared with the initial cost estimate provided by the Government of around $3 billion.

The problem appears to have been that the initial cost estimates were prepared in a hurry, possibly based on incomplete specifications of the projects and out-of-date or inappropriate cost data. As the announcement was made in the lead up to an election, the Government might have been too excited about the electoral appeal of the hospitals to do the detailed analysis that is generally expected before committing billions of dollars. Unfortunately, once the election announcement was made and a public expectation was created,the Cabinet would have felt unable to stop the project, had it wanted to, once it saw more realistic cost estimates in the business cases eventually prepared by Queensland Health.

Ben asked me about the comments former Premier Beattie made earlier in the day, which reportedly included the comment that you can’t expect detailed business cases for hospitals because they’re not built to make money but to treat people. I told Ben I thought this was a distraction from the real issue. The debate isn’t over whether hospitals should be run as private businesses, but rather whether the Government should have done more work assessing the costs and benefits of the new hospitals before committing to build them. Clearly it could have and should have. “Business case” is now a generic term for an assessment of the merits of any project or investment, not necessarily a business investment designed to make money. Business cases could have been prepared for the hospitals with more reasonable cost estimates than the Government announced, after the appropriate advice from construction cost experts was obtained, of course. These business cases could have contained an assessment of whether the three hospitals were the most cost-effective means of meeting anticipated future community needs.

Governments can make very bad decisions when they haven’t done the proper analysis. It’s possible that, if the Government had known the hospitals would cost $2 billion more than expected, Queensland Health would have looked for other options for meeting the identified needs in the community. The hospitals decision reminded me somewhat of the Rudd Government’s decision to build the $40 billion plus National Broadband Network, a project that was heavily criticised for being committed to without a proper business case and cost-benefit analysis.

Where there are billions of dollars at stake, the Government has an even clearer obligation to the community to crunch the numbers before making any decision. While Governments often do the right thing, and there are guidelines and expectations in place for the preparation of business cases in many jurisdictions (e.g. see Queensland’s Project Assurance Framework), Governments sometimes bypass the usual processes, alas, so they can score quick political points.

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8 Responses to 4BC interview on hospital cost blowout – Govts need to crunch numbers properly before spending decisions

  1. Gavin says:

    I wonder if this is possible in the world of politics and the media? We know governments have competing priorities and there is no real way to compare outcomes like health with education or welfare like caring for the disabled – people have genuinely different opinions or values in these areas that money can’t capture at a cumulative level. As a result, the output or “value” is very hard to compare. Is it better to save 2 extra lives or assist 100 people live with dignity?

    So government departments, working in silos, pursue their individual aims. To get their projects funded (versus other departments’ projects) they lowball the initial bid. If they didn’t, it wouldn’t be in the hunt, because everyone else is lowballing. They can’t make a “value” argument because the outputs can’t really be compared.

    Then, everyone gets upset when the project comes in over budget and the media goes crazy. All of this when one politician from one party gets kudos for announcing (so it’s in their interest to green light it) and, years later, another politician uses the blowout to justify how bad the first one was – and so make the blowout seem as bad as possible.

    How can we overcome this dynamic in large government spending – it’s a constant issue (tunnels, defence spend, hospitals…) particularly with senior bureaucrats on contract too?

    • Gene Tunny says:

      Thanks Gavin. Good point about the political dynamic and the role of the media. This is why it’s important to have feasibility studies and business cases prepared by independent consultants rather than government agencies. Even though consultants will often be reliant on information and advice from departments, at least the data and assumptions will (usually) be transparent. This transparency helps promote good policy, because politicians will realise there is a limit to what they can get away with. Also, since the NBN, I think the media is more conscious of the need for business cases and hopefully will keep politicians accountable in the future.

    • Jim says:

      Gavin

      Some good points. “Lowballing” the initial bids is really common and a real problem for large constriction projects. I’m not sure what the solution is. Somehow incentivising proper costings would be a good start (e.g. penalties for agencies that miss-specify requirements or costs that subsequently trigger contract variations during construction).

      Furthermore, opportunities for contract variation need to be tightened. I have no idea how roads constantly cost 20-40% more than the initial budget when they are built under contracts. Humans have been building roads for several thousand years, so where is the technology risk that would warrant any contract variation?

      • Gene Tunny says:

        Jim, great idea about penalising agencies that get it wrong! Treasury would love it, I’m sure. Might be difficult to get agreed by the whole Cabinet, of course.

  2. Katrina Drake says:

    As with many major projects, if the total cost was known at inception, they never would have been started.

    Queensland now has 3 new major tertiary hospitals, providing impressive front line services to the population.

    Easy to be critical after the fact. Perhaps someone for treasury forgot to use their multiple of safety factor (x2 ).

    The real problem with Queensland Health budgets continues to be the on-going cost of servicing a population that abuses their health with alcohol, obesity and not taking care of their fitness and bodies.

  3. Good points made re “lowballing” and the need to tighten up on variations. Does anyone know how much of the cost overrun with the hospitals was due to variations made after contracts were signed? Cost-benefit analysis is a great idea but assumes that we are at least starting from a correct cost base.20-30-40% variations are not unheard of and these would obviously blow most benefit analysis out of the water.
    We see it all the time in local government where contracts are accepted (after a competitive tender process) only to be significantly hiked after the job has started; always with the excuse that the tenderer could not have known about some problem or other that subsequently comes to light.
    It appears that governments, both local, state and federal, put up with unexpected cost increases which no private customer would take lying down. If I get someone in to do work then a contract price is a contract price!

    • Gene Tunny says:

      Thanks for the comment, Conus. Yes, govts should fight harder against contract variations. From what I can tell from the report, for the three hospitals in question,the $2bn blowout is mostly the difference between what was the anticipated cost at election time when the projects were announced (i.e. before any contracts were in place) and the final cost.

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