“DISCREPANCIES” IN PROJECT COSTS

Press, Volume CVI, Issue 31128, 3 August 1966, Page 1

“DISCREPANCIES” IN PROJECT COSTS

Manapouri Estimate Up £l7m, Tongariro £2sm

(From Out Parliamentary Reporter!

WELLINGTON, August 2.

There was a “large discrepancy” between estimates of construction costs for major projects and later re-estimates, the Minister of Electricity (Mr Shand) reported in Parliament today.

The Manapouri project, which the Bechtel Corporation of America in 1962 estimated would cost less than £3O million, would in fact cost £46,510,000 The cost of the first three stages of the Tongariro scheme —a preliminary estimate in 1958 put the cost of the entire project at £47 million—had now risen to £72 million.

The final cost of the Matahina project, estimated in 1959 to be £8 million, was expected to be £153 million.

Mr Shand acknowledged “increasing and very proper public concern” about the discrepancies in a detailed statement to Parliament.

The Manapouri estimate had Increased approximately £l7 million in slightly over four years.

The first estimate was in a report which Consolidated Zinc, which then held the water rights, obtained from its consultants, the Bechtel Corporation, in January. 1962. On the company’s instructions this estimate was based on price levels obtaining at July, 1961, and this fact was emphasised in the report. “The estimate for the power scheme and transmission to Bluff, excluding interest during construction, was just short of £3O million,” Mr Shand said.

In 1963, when the Government took over responsibility for the power development and gave the company power rights in lieu of water rights, the Bechtel Corporation was engaged by the Government to continue with the engineering of the scheme. Revised Estimates Asked for a fresh estimate based on up-to-date prices, the corporation presented this in January, 1964. This estimate included allowance for increases up to 1968, the then proposed completion date, and for certain modifications incorporated in the designs. “It came to £33.33 million, excluding interest during construction,” Mr Shand said.

The next major review of the estimate was in June, 1965, and the new figure was £45.66 million. Of the factors contributing to the increase of £12.33

million over the estimate supplied in January, 1964, the most obvious was the labour situation.

“Over-Optimistic”

“It has become evident that the early estimates were based on insufficient understanding of New Zealand working conditions in areas such as West Arm, Manapouri, and Deep Cove, and also were over-optimistic about the possibilities of securing migrant labour,” Mr Shand said.

“Some of the earlier contracts were beset by labour shortages. Difficulties in management, and labour relations, and jurisdictional disputes between unions—all this has reflected in slower progress, more supervision and higher bonus and wage rates than had been anticipated. These, in turn, affected prices submitted by tenders for later contracts, and in the case of the power-house contract discouraged some of the potential contractors from tendering at all. “The sole firm tender received was so high that it was necessary to decline it and to negotiate a target estimate agreement with one of the tenderers which had offered a contract of this type. Because of this,’and also through the need to make additional provision for housing of married men and for importation of overseas labour, the estimate for the power house alone rose by approximately £7.5 million.”

Other items which were substantially increased were the tailrace tunnel contract and the transmission line. In the former, increased wages and allowances alone made a difference of £l.B million. The contract also included construction of the Wilmot pass road where it was found that apparently sound rock was treacherous in parts and

quantities to be moved had to be doubled. The transmission line estimates were increased by approximately £1.6 million on account of the large amount of access reading required for the construction and maintenance of this important line in rugged country, high cost of reading revealed by experience on the Wilmot road, and the increasing cost of labour in the area. “The estimate has been further reviewed in May, 1966, and increased by £850,000 to £46.51 millions,” Mr Shand said.

The major increases were £1.06 million for the tailrace tunnel contract to allow more for labour, difficult tunnelling conditions, and the settlement of a claim for the Wilmot pass road, and £475,000 for the power-house contract due to a reassessment of cost increases. These increases were offset as a result of a further review and reconsideration of the cost of the transmission line.” Tongariro Scheme Turning to Tongariro, Mr Shand said the first public indication of probable cost was given by the Labour Minister of Electricity (Mr Watt) in a statement on electric power development in 1958. The whole development was assessed to cost £47 million. When, early in 1964, the Government approved in principle the first three stages, the estimate was £46.8 million forthem, and £70.7 million for the whole development, based on construction costs at that time.

“As the construction establishment has been set up and work has proceeded, it has become evident that costs are going to exceed these estimates very substantially,” Mr Shand said. “The estimate for these stages, based on the latest construction cost index, is £7l million,” Mr Shand said. “Allowance for further escalation to completion would bring this total to £77 million but after expected recoveries of £5 million the net expenditure would become £72 million.”

Increase Factors As factors responsible for the increase from 1964 to the current estimate, Mr Shand listed:— General increases cf construction costs, in line with world-wide trends, £l3 million to completion. The decision to make Turangi township a permanent feature, with correspondingly higher standards than the usual construction -town, £1.6 million. Reading of higher standard than originally assumed, a “permanent asset to the area,” £1.25 million. Provision for land purchases.

compensation, remedial measures, and fisheries

protection, £1.85 million. Consultants’ fees, £1.7 mil-

lion. Civil engineering costs generally higher than originally estimated, tunnels £4.5 million, other works, £5.8 million.

Mr Shand explained that included in the extra costs were amounts which allow recoveries of some £5 million to be achieved by sales of houses, industrial sites, etc. The project’s fourth and fifth stages—not yet approved —may not necessarily go ahead in full. Detailed firm estimates for these stages are not yet available. “In view of the doubt about these schemes, the part of the cost of Turangi village, etc., originally assessed against them has now been charged against stages one to three,” Mr Shand said. “Bad Example” Mr Shand cited Matahina as a “bad example” of actual costs exceeding estimates. The main factors in addition to rising construction costs, were the construction difficulties and increased quantities which, because of the area’s geological nature, became apparent as the site was opened up. “If the usual amount of site investigation had been done some of these difficulties would have been revealed, and the original estimate would undoubtedly have been considerably higher,” said Mr Shand.

“Much of the discrepancy in the Matahina estimates can therefore be attributed to the Government’s undue haste in deciding to go ahead with the scheme, a situation brought about by the abandonment of the plan recommended by the 1957 Combined Committee.”

The project was approved in 1959.

One of the difficulties besetting estimators in all countries was that of estimating tunelling costs accurately, Mr Shand said. This was particularly so in New Zealand. “Tremendous strides have been made in tunnelling methods, but should the estimator assume that such improvements will continue or that a plateau has been reached?” the Minister asked. Avoiding Inaccuracy

“Because of changing circumstances it appears that future estimating for power projects should be done on two bases,” he suggested. One would be as at present using the latest available construction cost index, and the second would be with suitable allowance for expected increases in costs up to the time of completion.

This would allow for better comparison of projects of widely different types, provide for more accurate forward planning of expenditure, and remove the “inevitable criticism” that a project has cost very much more than stated when it was authorised. Mr Shand said careful attention also was being given to measures ensuring that future estimating of major works would be more accurate.