Infrastructure’s Bad Reputation

Joan Jett (CC pic: Mark Runyon | ConcertTour.org)

Joan Jett (CC pic: Mark Runyon | ConcertTour.org)

Infrastructure has a poor reputation as an investment, among people who don’t work in the infrastructure sector. Many people seem to associate large infrastructure projects with time and cost overruns. Is that fair?

I was reminded of this the other day, when I read an article on FT Adviser talking about insurance company Aviva investing in infrastructure. The article quoted one James Robson, a financial adviser and clearly not an infrastructure expert, as saying:

“The UK is behind the curve on infrastructure spending. It’s quite embarrassing when compared with a country such as China. The problem is that I cannot recall an infrastructure project that came in on time and on budget. There are many variables involved, not least the political risk that a new government could scrap projects like the High Speed 2 rail link. This whole area requires major due diligence.”

I have several problems with that statement but let’s stick to the bit in bold. This man presumably tells his investor clients who are seeking advice on where to put their money, that infrastructure investments are not a safe bet because – his own words – they don’t come in on time and on budget.

There have been many studies published into infrastructure cost overruns; one of the leading authorities in this field, Bent Flyvbjerg, has written on the subject over and over again. He concludes that those projects do indeed tend to go over time and budget frequently; but many of the projects he and others consider are not, in fact, relevant to a private investor. What they ought to know is, do projects that they can invest in – those which are privately financed – tend to go over time and budget? When you ask this question, you get a different answer.

This 2008 Australian study, not by Flyvbjerg, is one of the more reputable and transparent ones. It looked at 25 infrastructure projects that were delivered as public-private partnerships. That’s to say, they were privately financed and delivered on behalf of a public authority, with the public and private sectors sharing risks. They are precisely the sort of public project relevant to Aviva or Mr Robson’s clients. The study compared the PPPs to conventionally procured (publicly funded) projects.

One finding was that, measured between the private party signing contracts and finalising its finances, and commissioning of the completed infrastructure (‘Stage 3’), the number of such projects that went over five per cent behind schedule was 27.8 per cent. Therefore nearly three-quarters didn’t get that far behind.

Source: Duffield, C., Raisbeck, P., Xu, M., Report on the performance of PPP projects in Australia when compared ith a representative sample of traditionally procured infrastructure projects. National PPP Forum – Benchmarking Study, Phase II

Source: Duffield, C., Raisbeck, P., Xu, M., Report on the performance of PPP projects in Australia when compared ith a representative sample of traditionally procured infrastructure projects. National PPP Forum – Benchmarking Study, Phase II

And as for budget overruns, the number was slightly higher at 30 per cent. That’s still a clear majority having no or little budget overrun though.

duffield_cost_overruns

But there’s more. The median cost overrun for PPP projects in this stage is zero – meaning that many projects come in under instead of over budget:

duffield_cost_median

And for time overruns, it’s zero median again:

duffield_cost_median duffield_time_median

So, for the period that’s relevant to investors – the period between when they put their money on the table and when the project is built, up and running – most of those projects got done on time and budget, or close to it. What’s more, the middle amount of cost and time overrun for the sample is zero.

Critics should think twice before publishing unreliable soundbites about infrastructure. It is not immune from time and cost overruns, and there are a handful of high-profile failures like Reliance Rail and the London Underground PPPs, but projects invested in by the private sector have a strong track record of cost control, non-default and overruns being absorbed by contractors instead of investors.

Part of the reason people associate public infrastructure with time and cost overruns is because the information is out there: the projects have a high public profile compared to, say, commercial property developments which get done behind closed doors. Yet investors who are sniffy about investing in new infrastructure (yes you, London Pension Funds Authority) are usually happy to invest in new office blocks. If comparable data were available for the property sector, it might make for interesting reading.

Further reading here.

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About René Lavanchy

You can contact me at rene dot lavanchy at googlemail dot com.
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2 Responses to Infrastructure’s Bad Reputation

  1. Oli says:

    A question: does the extra cost of financing infrastructure through private debt, and the extra layers of administration, profit, executive salaries, etc, come in at more or less than the savings you get from PPPs being less likely to be late and over-budget?

  2. René Lavanchy says:

    Well, in developed PPP markets such as the UK, Canada, France and the Netherlands, the usual practice is to do some sort of public sector comparator. In theory, the PPP doesn’t go ahead unless the PSC demonstrates that it would deliver value for money compared with traditional procurement. Critics say that such studies can be skewed in favour of PPP, and when was the last time HM Treasury turned down a PPP on such grounds (as opposed to cancelling for political reasons)? I don’t think the Treasury can point to one.

    What’s more, value for money doesn’t necessarily mean lower whole life cost, because qualitative as well as quantitative factors (such as level of service provision) are also taken into account. And you can point to examples where there’s considerable evidence that the PPP route wasn’t cheaper – the Intercity Express Programme being one; they are going to be much more expensive to maintain than any current main line trains, including quite new ones.

    In conclusion… it’s all a bit murky, at least in this country. They probably have better data in the Netherlands. The Canadian screening process is one of the most thorough, and Canada (like the Netherlands) is a very active PPP procurer.

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