Complex challenges of mega transport infrastructure projects

As Australia’s population grows, especially in major cities like Sydney and Melbourne, the need for large-scale infrastructure becomes increasingly important. Transport infrastructure, in particular, plays a vital role in promoting social well-being, economic growth, and access to work and services. It also offers opportunities to reduce our carbon footprint with adequate forward planning. However, with these mega developments come risks not typically encountered in smaller projects. Mega projects often involve enormous financial commitments, a greater depth of complexity, and long-term impacts. Transport projects—whether highways, tunnels, or railways—require vast amounts of land, leading to significant environmental, social, and political consequences. This makes risk mitigation and insurance strategies critical. Contractors and consultants engaged on these projects need to consider how to manage the risk associated with undertaking work on large scale infrastructure.

Sydney and Melbourne are projected to reach populations of 6 to 7 million each by 2035. This rapid growth necessitates the development of major infrastructure. Currently, transport projects account for 58 per cent of Australia’s infrastructure pipeline. Over the next five years, the country will deliver major transport projects such as Melbourne Metro, Gold Coast Light Rail Stage 3, and Sydney Metro. In comparison, social infrastructure projects, like hospitals and schools, represent only 15 per cent of the pipeline.

These transport projects are vast in scope. For example, the WestConnex project, completed in 2023, is Australia’s largest ever underground road project. Initially estimated at $10 billion in 2012, final costs were nearly double that amount. More recently, the Sydney Metro City, which opened on 19 August 2024 as part of a $15.5 billion rail expansion, connects key urban areas through a new rail network running from Chatswood to Bankstown via the CBD.

Mega transport projects, especially those involving tunnelling, are often plagued by unpredictable ground conditions and environmental risks. Brownfield sites, in particular, present significant challenges, including exacerbation of existing land contamination. For instance, the WestConnex Stage 2 and NorthConnex Twin Tunnel projects encountered unforeseen ground movements and geotechnical issues, highlighting the difficulty of fully understanding environmental conditions before construction begins. Vibration is another serious environmental concern. Homeowners near the WestConnex development reported extensive damage to their properties due to vibrations from tunnelling and soil changes. To manage these risks, continuous vibration monitoring is essential throughout the construction process.

With Australia experiencing a surge in infrastructure projects, interface risk is becoming a significant challenge. Interface risk occurs at project points where the scope of two or more contracting parties intersect. Brownfield locations and areas with multiple concurrent projects are particularly vulnerable to interface risk. For example, Sydney Metro Stage 2 was initially planned as a single public-private partnership but was divided into smaller packages to better manage the project’s complexity and interface risks. Without proper coordination, interface risks can lead to delays, cost overruns, and reputational damage.

The concentration of projects in urban areas often leads to social license issues, where public opposition or local disruptions delay timelines and increase costs. For example, acquiring land in built-up areas can lead to compensation disputes and unexpected design changes, driving up costs. Moreover, a growing focus on Environmental, Social, and Governance (ESG) principles is pushing banks and investors toward more sustainable projects, which can further complicate project delivery. Recent oil and gas infrastructure projects, for instance, have struggled to secure financing due to these ESG considerations. As 70 per cent of Australia’s greenhouse gas emissions are tied to infrastructure, decarbonizing supply chains will significantly affect construction practices over the next 5 years.

Mega projects bring unique insurance challenges due to their scale and complexity. The potential for catastrophic losses, coupled with difficulties in assessing risks, makes them less appealing to insurers. Changes in the availability and cost of insurance are also affecting project delivery. For instance, industry participants estimate a 50 per cent reduction in insurance capacity for construction projects, which is impacting contractors’ ability to participate in bids. While insurance risks can be managed, the growing trend is for these risks to be transferred back to the government, which may need to use public funds to address these issues, especially if the private sector is unable or unwilling to do so.

Contractors, subcontractors and consultants need to understand the framework of the insurance placement in relation to such projects, and design their contracts to align with the overall project placement. Such projects are often arranged by State or Federal governments on a “principal arranged” basis. Such cover would include material damage, liability and in some cases, project specific professional indemnity.

When this is the case, Bellrock has noted that the main contractor does not ordinarily amend their downstream contracts to “cascade” the benefit of the cover they receive to the subcontractors and consultants they engage in relation to the works.

Contractors and consultants should engage with their insurance advisor to assist with dovetailing the contractual indemnity and insurance requirements with the insurance framework on the project. During the tender process, questions should be asked in relation to the insurance apportionment for the project, coverage terms and conditions and the excess applicable to claims. Your advisor can then purchase cover to “fill the gaps” or address shortcomings in the principal’s policy (including excess buy down cover).

As Australia’s infrastructure network expands, the ability to effectively manage critical risks like ground contamination, interface issues, and social license concerns will be essential to successful project delivery. With billions of dollars invested in these projects, collaboration between insurers, contractors, and government bodies is crucial to ensure adequate risk mitigation and proper insurance coverage. Addressing these challenges head-on will determine the success of Australia’s future infrastructure.

For those participating on such projects, early engagement of your risk advisor to assist with contract compliance and risk advisory can not only reduce costs, but also provide greater confidence when entering into a contract relating to mega projects.