The trouble with government ‘megaprojects’

After the Olympics last year, I found myself in a lot of trouble with readers. I pointed out that the whole thing had come in massively over budget, and that there was no way of knowing if it had delivered much in the way of economic benefits in either the short or the long term.

You can read those posts and get yourself all het up again here, here, and here.

I was pleased to see John Kay addressing the matter again in the FT this week (I think the overspend on the Olympics is a bit like the Royal Mail debacle – we shouldn’t let it brushed under the carpet).

Kay runs through the history of the horrible overspend. In 2003 it was estimated that the bill would come in at around £3.1bn, of which the taxpayer would have to come up with £1.3bn (the rest would be recouped by the sale of assets after the games). The bid that actually went in to the International Olympic Committee put the sum at £4.2bn. By 2007 it had risen to £6.5bn with a contingency of £2.8bn.

In the end, the total cost to the taxpayer was ten times that first suggested. Some people still like to say that the games came in within budget. This is just nonsense.

So what of the economic benefits? The papers produced by the government on this, says Kay, are surely an “embarrassment”, conflating as they do “incommensurable monetary amounts and confusing costs with benefits”.

The UK isn’t alone in not being able to get large projects done in the way they say they are going to. But David Cameron should take a closer look at what happened with the Olympics  with HS2 in mind. Because, as Kay points out, if there is one other type of project that pretty much always costs more and delivers less than promised, it is rail.

It is worth reading the first chapter of Professor Bent Flyvbjerg’s book on big transport projects, Megaprojects and Risk, to get a feel as to why these projects all go so very wrong.

The key bit for me is this: “Megaproject development today is not a field of what has been called “honest numbers”…. whether we like it or not, megaproject development is currently a field where little can be trusted, not even – some would say especially not – numbers produced by analyst… project promoters often avoid and violate established practices of good governance, transparency and participation in political and administrative decision making, either out of ignorance or because they see such practices as counterproductive to getting projects started.”

Sounds familiar doesn’t it?

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

ScreenHunter_01 Mar. 25 09.51

New to MoneyWeek?

Ed Bowsher Editor Money Week

Welcome, and thank you for visiting us.

Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and tell you how to profit from them.

If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.

Every working day the MoneyWeek team sends out a hard-hitting email, 'Money Morning', giving you a rundown of the latest financial events, and revealing what you should do to maximise profits and head off losses…

And with your permission, I'd like to send you Money Morning for FREE.

To sign-up enter your email address below.

We hope you enjoy your stay on the site. Good luck with your investments!

Ed Bowsher,
Digital Managing Editor, MoneyWeek

(No thanks)

Because these emails are completely free, we do have to fund them with advertising. Occasionally we will send you promotional emails, however we will never give, sell or rent your email address to any other companies.For more information, please see our Privacy policy.

14 Responses

  1. 03/12/2013, Boris MacDonut wrote

    Merryn. This article is on the right tracks. It touches on fallability and human nature. People always overestimate their abiltiy to predict the future hence the massive corrections and the overspends. But then is it a problem? Spending is a good thing.
    If I am going for my annual sojourn in Italy and guess it will cost £4,000 but find in September it realy cost £5,500 who is the loser? Not the World economy, not the Italian economy and not me.

    • 04/12/2013, Critic Al Rick wrote

      Boris, the UK Economy is the loser – not just of the extra £1500!

      If you were patriotic you wouldn’t have jollies abroad.

      If the UK Govt was patriotic, nay responsible, it wouldn’t patronise foreigners when updating infra-structure, etc…

      • 04/12/2013, Boris MacDonut wrote

        But Rick. I am not patriotic and spending is a good thing.

        • 04/12/2013, Critic Al Rick wrote

          I wouldn’t disagree that spending within your means is a good thing. I don’t doubt that as an individual you do spend within your means; but as part of the UK citizenship you are, by spending money abroad, not spending within the means of the UK citizenship. Not whilst the UK has a net cumulative Balance of Payments Deficit.

          This argument can be extrapolated to expenditure by the UK Govt on goods and services provided by foreigners.

          In whomever’s interest our Govt (LibLabCon) is acting, it certainly isn’t in the long term best interests of the overwhelming majority of the UK populace.

          Perhaps by stating yourself not to be patriotic you consider yourself to be, not a UK citizen, an EU citizen. In whomever’s interest the EU Govt is acting, it certainly isn’t in the long term best interests of the overwhelming majority of the EU populace.

          And so on and so forth… The day of reckoning cometh.

          You have seen the light regarding the rigged playing-field… I wonder how long before you see the light regarding Balance of Payments Deficit!

          • 05/12/2013, Boris MacDonut wrote

            Rick. The clue is in not patriotic. I am happy to spend anywhere in this global economy and happy for thousands of rich Chinese to spend in London. I am happy to embrace reality.

  2. 04/12/2013, GFL wrote

    As long as governments prescribe to Keynesians School of thinking, this over spend is not seen a problem. Conventional wisdom is all spending is good and stimulates the economy.

    Governments like people to believe this, because it allows them to justify silly election bribes/promises and spending willy-nilly.

    I would prefer individuals to keep more of their own money, so we can collectively pick winners and losers.

  3. 04/12/2013, Boris MacDonut wrote

    Today the Government announced £375 billion of infrastructure projects over 20 years. What they don’t mention is this amounts to 1% of GDP and 1.9% of Governemt income. They must be hoping folk see it as a big number without realising it is dwrfed by reality.

    • 04/12/2013, Critic Al Rick wrote

      I wonder how much of the £375 bn will swell the UK’s cumulative Balance of Payments Deficit.

  4. 04/12/2013, Bayard wrote

    ” if there is one other type of project that pretty much always costs more and delivers less than promised, it is rail.”

    I suspect it has always been the case, even when the railways were being built. “He threatened his life with a railway share…”

  5. 05/12/2013, robin wrote

    Ok, but what if we choose to invest all our money that we would have spent on water supplies, on building HS2?

    I agree that there is a point when dropping money out of helicopters is the thing to do, but that doesn’t mean money can’t be better spent.

    They should get rid of HS2 and instead replace the north and south circular with a proper motorway. If the economy is really transactions, rather than money, then speeding up transactions makes sense. If people can get from A to B quicker, those are quicker transactions. This would be far more valuable than HS2.

    While they are at it, add a motorway though the centre of London. Close off Oxford Street to pedestrians. Extend each rail line to have two rail lines. Anything we do to make London a thriving city will have a disproportionate effect on the UK economy.

  6. 06/12/2013, Borderer wrote

    The trouble with megaprojects is the way they are procured, and for this we can thank our friends in Brussels for their directives enshrined in UK law as the Public Procurement Regulation 2006 (and numerous amendments). A living example of the law of unintended consequences, this was intended to foster competition and stop local councillors from giving work to their best mates by banning ‘negotiation’ with bidders after their bids were submitted to avoid noncompetitive bidders amending their prices ‘after the event’.

    The intention was that bidders who submitted qualified bids were automatically disqualified and so the Best price obtained.

    Unfortunately, on mega projects ALL bids are necessarily qualified -the complexity of them can mean nothing else, so the analysts must make assumptions on the likely cost of these qualifications to arrive at a level playing field price for each bidder. This produces a range of prices, and I leave it to your imagination as to which price the politicians declare.

    Incidentally Merryn, I wouldn’t set to much store by the worthy Professor Flybgjerg’s wholly academic approach. He refers to the Hong Kong airport’s massive cost overun as an example to support his case, but this was the result of Governor Chris Patten’s determination to reap the maximum benefit to British companies before the UK handed Hong Kong over to the Chinese government.

    I speak as one of the ‘analysts’ on that project.

  7. 07/12/2013, NeutronWarp9 wrote

    What trouble? Why do some people enter politics in the first place? To get close to power and its benefits – one of them being money. Every mega contract has ”incentives” for the key individuals involved.
    The Olympics, aircraft carriers & HS2 are big-wins for the companies AND the key decision-makers involved. If a project goes over budget it is simply a bigger kick-back day for those in the right place to benefit. It has always been like this.
    Why be so outraged (again)? Many people pretend Britain is not corrupt. Wake up. Or, there again, is it just ‘business’ with taxes going to the Exchequer (unless you are American big business that can do a deal with an HMRC bod in a suit).

  8. 08/12/2013, Orb wrote

    “£375 billion of infrastructure projects over 20 years .. amounts to 1% of GDP and 1.9% of Governemt income”

    Call me a dummy, but does that mean gov income is nearly twice GDP? I DO know that the projected annual deficit (and therefore addition to the national debt owed by taxpayers) was £120bn.

    The day of reckoning cometh… it’s all kicking off in Japan nicely! (Abenomics seemed a bit shortsighted with import price inflation figures with a devaluing of the Yen)

  9. 09/12/2013, Boris MacDonut wrote

    Orb. Maths not your strong point? GDP is now approx £1.6 trillion and historically has risen at 1.6% pa. Government Income is about £700 billion. Hence over 20 years the £375 billion equates to a total of about 1%(actually 0.9%) of 20 years GDP and about 1.9% actaully nearer 2% of Gov’t Income. Orb. It means GDP is well over twice Government income.

Comment on this article

MoneyWeek magazine

Latest issue:

Magazine cover
Walking out on the banks

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 3 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

The problem with the Bank of England

Fracking: Nine reasons not to get carried away

Five small-cap stocks worth a flutter

This Dutch company could help us tame floods

ScreenHunter_01 Mar. 25 09.51

Get the latest tips and investment opportunities from MoneyWeek magazine: Claim 3 FREE Issues HERE