Infrastructure is too costly

Spending money on infrastructure is not the answer to our problems, says Merryn Somerset Webb. It usually destroys more value than it creates.

Is spending money on infrastructure the answer to all our problems? Most people seem to think it is. But I'm in the middle of reading a paper from James Ferguson of Westhouse Securities that suggests rather the opposite. It seems that while big projects might add directly to official GDP in the short term (which is why governments love them), when the final sums are done, it usually turns out that they have destroyed more value than they have created.

According to research from Bent Flyvbjerg of Said Business School who looked at projects in 20 different nations in his report Survival of the Unfittest: Why the Worst Infrastructure Gets Built around 90% of big projects suffer from cost overruns, and those cost overruns come in at an average of 45% of the spend for rail projects and 33% for bridge or tunnel projects. But it isn't just the cost that the planners almost invariably get wrong. It is the benefits too. The traffic on the average rail project is overestimated 90% of the time, with forecasts for usage tending to come in at about double the actual usage.

Eurotunnel was a pretty classic example of this kind of thing. The construction costs overran by 80% in real terms; the financing costs overran by 140%; and the usage has been only around a third of what the project's architects originally envisaged. The same goes for the Danish Great Belt rail tunnel, which opened a few years after the Channel Tunnel its cost excess was 120%. Other examples in Britain? The Millennium Dome, the Scottish Parliament building, Edinburgh's horrible tram project, the West Coast Mainland upgrade, the Olympics, and so on.

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It is a long list but one that is guaranteed to get a lot longer. Ferguson has used Flyvbjerg's figures to look at the British High Speed Rail Link (HS2) making the reasonable assumption that it will involve the same empire-building, pork-barrelling, incompetence and skewed incentives as most other projects. If costs overrun by the usual amount for a rail project, and you work with the estimates on both currently given by the Department of Transport, says Ferguson, this would mean that HS2, far from providing a positive benefit to the taxpayer or even breaking even (ever), would "generate a loss of 79p on every £1 spent". So much for using infrastructure to "create growth".

Still, cast your eyes over to China and you will see that the money we might waste on HS2 (which I used to be quite keen on) is nothing but a statistical irrelevance. China's infrastructure spend is currently nearly 50% of GDP. That's a record global spend even Japan didn't go over 40% during its own infrastructure bubble. But, assuming that Chinese projects are as rubbish as everyone else's, it's also going to end in a record global bust.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.