Megaprojects: The good, the bad, and the better
Building big infrastructure projects is always risky, but there are ways to improve the odds of a smooth landing.
Megaprojects for infrastructure are crucial to the future of cities, states, and individual livelihoods. The problem is that these projects often go off the rails, either with regard to budget or time—or both.
However, it’s important to remember that building and maintaining infrastructure is a critical and sometimes even lifesaving undertaking.
Sewage and water-supply systems, for example, keep diseases such as cholera at bay. Much of the Netherlands would be under water without the North Sea Protection Works, which guards that low-lying country’s landscape
Infrastructure Megaprojects can also be economically transformative.
Big infrastructure projects can also be economically transformative. Consider the Panama Canal. It accounts for a significant share of the country’s GDP.
Dubai’s international airport is the world’s busiest, accounting for 21 percent of Dubai’s employment and 27 percent of its GDP. And Hong Kong would surely grind to a halt without its clean and speedy subway system, the MTR, which has enabled the densely packed city to build beyond the downtown districts.
All these megaprojects have worked as intended
All these megaprojects have worked as intended; indeed, it is almost impossible to think of these places without them. Not surprisingly, all of them are being expanded. Also not surprisingly, the canal and airport projects are both running late and well above the initial budget; even the hyperefficient MTR has run into delays with some of its projects.
McKinsey estimates that the world needs to spend about $57 trillion on infrastructure by 2030 to enable the anticipated levels of GDP growth globally.
Of that, about two-thirds will be required in developing markets, where there are rising middle classes, population growth, urbanization, and increased economic growth.
These countries need infrastructure, but all too often many years will pass and the promised road, bridge, and metro projects still will not have materialized.
The risks associated with megaprojects
The risks associated with megaprojects—those that cost $1 billion or more—are well documented. In one influential study, Bent Flyvbjerg, an expert in project management at Oxford’s business school, estimated that nine out of ten go over budget.
Rail projects, for example, go over budget by an average of 44.7 percent, and their demand is overestimated by 51.4 percent. McKinsey has estimated that bridges and tunnels incur an average 35 percent cost overrun; for roads, it’s 20 percent.
Given that many projects are approved with a 20 percent return on investment expected, this leaves governments to pick up the tab for the rest.
Why projects go bad?
There are three main reasons for failure.
Overoptimism and overcomplexity. In order to justify a project, sometimes costs and timelines are systematically underestimated and benefits systematically overestimated.
Flyvbjerg argues that project managers competing for funding massage the data until they come under the limit of what is deemed affordable; stating the real cost, he writes, would make a project unpalatable. From the outset, such projects are on a fast track to failure.
A common example of this comes when big projects cross state or national borders and involve a mix of private and government spending. For example, a new railway could involve three national governments, numerous local governments, different environmental and health standards, varied degrees of skills and wage expectations, and dozens of private contractors, suppliers, and end users.
Just one issue can stall the process indefinitely. In one case, for example, it took two countries a decade to work out the diplomatic considerations that allowed them to build a hydroelectric dam. All too often, these complicating issues are not deeply considered or priced to the fullest before launching a project.
Poor execution. Having delivered an unrealistically low project budget, the temptation is to cut corners to maintain cost assumptions and protect the (typically slim) profit margins for the engineering and construction firms that have been contracted to deliver the project. Project execution, from design and planning through construction, is riddled with problems such as incomplete design, lack of clear scope, ill-advised shortcuts, and even mathematical errors in scheduling and risk assessment.
Weakness in organizational design and capabilities. Many entities involved in building megaprojects have an organizational setup in which the project director sits four or five levels down from the top leadership. The following structure is common:
- Layer 1: Subcontractor to contractor
- Layer 2: Contractors to construction manager or managing contractor
- Layer 3: Construction manager to owner’s representative
- Layer 4: Owner’s representative to project sponsor
- Layer 5: Project sponsor to business executive
This is a problem because each layer will have a view on how time and costs can be compressed.
For example, the first three layers are looking for more work and more money, while the later ones are looking to deliver on time and budget. Also, the authority to make final decisions is often remote from the action.
How to deliver on the promise of megaprojects
Any big project carries a big opportunity for failure, but regularly going over time and over budget implies that there are systematic errors at work. And that means these problems can be identified and addressed.
Typically, when projects go wrong, hindsight shows that the problems began at the outset, due to poor justification and need for the project, misalignment among stakeholders, insufficient planning, and inability to find or use the appropriate capabilities.
Costs are commonly underestimated and benefits overestimated. As a result, the baseline for assessing overall project performance is wrong. The key is to first establish social and economic priorities and only then to consider what projects are best suited to deliver them.
That requires developing independent and robust analyses on the true cost and benefits. Some countries are closer to achieving this ideal than others. Singapore, for instance, has a national goal for dense urban living, with public transit accounting for 75 percent of journeys.
This aspiration guides how the Land Transport Authority selects transport projects. Without such rigor and oversight, you can imagine bridges to nowhere, excess power supplies, and empty roads.
Do the engineering and risk analysis before starting construction.
This is often stated but rarely followed, though doing so clearly improves project performance. Edward Merrow, the founder of the Independent Project Analysis consultancy and author of a book on megaprojects,3 has shown that the best examples of project-definition work reduce both project timelines and costs by roughly 20 percent.
Streamline permitting and land acquisition.
It’s not unusual that it takes longer to get approvals for a project than to build it. Best practices in issuing permits involve prioritizing projects, defining clear roles and responsibilities, and establishing time limits all along the way, including on public review.
Providing “one stop shop” permitting can help. By applying these approaches, England and Wales cut the time to approve power-industry infrastructure from 12 months to 9, compared with an average of four years in the rest of Europe.
Build a project team with the right mix of abilities.
Without a well-resourced and qualified network of project managers, advisers, and controllers, projects will not deliver the best possible return on investment. At worst, they will fail.
Investors and owners need to take an active role in putting together the project team.
It is not enough for them to have a vague theoretical overview of how the project should work. They need to create a detailed, practical approach to deal with such likely eventualities as managing quality risks, escalating contractor’s costs, or replacing a high-tech supplier.
An experienced project manager is not enough; players must assemble a team that has all the requisite skills, including legal and technical expertise, contract management, project reporting, regulatory approval, stakeholder management, and government and community relations.
The world needs megaprojects to deliver the economic and social goods that billions of people lack and to create the economic growth that will pay for them. But a bad project has consequences that go well beyond a specific bridge, tunnel, or sewage system. Getting it right, or at least better, is good for everyone.