Grouting insurance cancelled: To save pennies, state undermines Newcastle's redevelopment

Last month it announced abolition of a fund that has insured inner-city developers against cost overruns in grouting - the unpredictably expensive filling-in of old mine workings under the sites of planned residential and office towers. Launching a high-rise construction project without that security is now difficult or impossible.

Providing confidence was why the Liberal-National state government in 2015 rather cleverly created this enormously useful device called the Newcastle Mines Grouting Fund. Until abolition was announced, $11 million was in the fund, now reduced to $6 million for supporting only projects it already covers.

Financially, the key figure is not the sum in the pot but the rate at which it's paid: $1.2 million over the past eight years, averaging $150,000 a year. That mere trickle has given assurance to developers of a dozen projects that may have been unfeasible without it.

Jonathan Craig, director of developer GWH, told the Herald last week that the fund had been "the only thing that got development going in the city". Unless there is some further change, his company can't proceed with three or four projects, he says.

No doubt some companies will still go ahead with some buildings, but it will be no surprise if our huge inner-city redevelopment zone remains semi-derelict for at least another decade, as it is now. What a fiasco.

Labor has closed the fund to new applicants to help pay for election promises, says Minister for the Hunter Yasmin Catley, fulfilling a traditional major role of a minister for the Hunter, which is to explain why the Hunter isn't getting something.

The ground under much of Newcastle, particularly the inner city, is honeycombed with old mines. The risk of land subsidence from tunnel collapses is usually acceptable for low structures, which can be fixed or, in extreme cases, rebuilt. Compensation is available.

But for a building of five storeys or more the risk is quite unacceptable. Imagine a tilting high-rise, with all its floors sloping. The cavities below just have to be grouted before construction begins, filled with a mix of materials, including cement.

The problem is that no one can be sure how much grouting is needed. Geotechnical engineers can give only an estimate.

Developer and former Newcastle lord mayor Jeff McCloy is building a residential estate at Teralba where undermining requires grouting even under bungalows. His grouting budget has blown out 50 per cent to $8 million, he says.

One expert says that for a large inner-city development site of, say, 4000 square metres, the grouting estimate could be $1.5 million, but the actual cost may turn out to be twice as much, or even triple.

So the Newcastle Mines Grouting Fund has capped developers' costs - at levels that probably won't be reached. For example, between Union and Darby streets, developers have been liable for the first $300 per square metre; above that, the fund pays.

So it's like an insurance policy with a large excess.

Of the 12 projects that the fund has covered, grouting costs have been determined for seven. Three exceeded their caps. One was the second stage of Iris Capital's apartment project in the Hunter Street Mall, for which the fund paid $328,377. The key benefit has been not the cash payout but the certainty provided at the outset of a project.

Now that it's gone, consider the difficulties in getting a development going. Almost all are built with borrowed money, so we can imagine what a bank officer will tell a developer: "You want us to lend you money for this building, but you can't even tell us how much it will cost. Are you kidding?"

A long-time investor in major Newcastle real estate developments comments on withdrawal of the fund: "The banks, the banks, the banks. That's where the problem is going to be."

Smaller projects are imperiled the most, because grouting is a larger part of their costs. Geotechnical engineer Simon Baker at Tetra Tech Coffey points out that grouting must spread one metre laterally for every two metres of depth, so the cost per square metre of a small site is especially high, and so is the risk.

People have bought sites large and small with the expectation that the fund would be available. They may now find they've grossly overpaid for land that can no longer be developed. And the rest of us won't see projects that would have brought life back to our half-dead city centre.

And all this damage has been done for the sake of saving a dribble of money that would barely pay for only one of the state's 360,000 full-time-equivalent employees. Within the government, the specific people to hold responsible are Premier Chris Minns, Treasurer Daniel Mookhey and Planning and Environment Minister Paul Scully.

I asked the government whether it thought the fund had been ineffective and whether the industry had been consulted before the decision to abolish it. The Hunter and Central Coast Development Corporation, which administers the fund, responded by answering neither of those questions. It instead reiterated the decision and pointed to the $1.2 million already paid.

I found no one in the industry who had been consulted.

Well, by now the government should know what damage it's doing. It should promptly restore the fund.

If there has been a fault with the scheme, it has been the offer of insurance without a premium: developers haven't had to pay for coverage. My suggestion is that if the state budget of more than $100 billion a year can't afford a tiny subsidy for fixing inner Newcastle, then the fund can be re-established with a fee, perhaps around $200,000 for a typical project.

One way or another, Newcastle needs that fund operating again.

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