Infrastructure is too costly

By MoneyWeek editor-in-chief Merryn Somerset Webb Aug 30, 2012

Merryn Somerset-Webb

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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.

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.

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Published in UK economy | More articles by Merryn Somerset Webb

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  • 1. John Brown

    (31 August 2012, 12:19PM)  Complain about this comment

    We are now post-industrial, and to a lesser extent post-technological, which probably ought to be reversed. France has realised this, cutting the working week to 35 hours.
    Here, we keep many young people unemployed, and work older experienced people to death, often subjecting them to appalling commuting conditions in a transport system that is very inadequate.

    Recession and austerity is forecast to last till 2020, and we should plan for it, and not against it.

    Encourage the conversion of empty city centre premises to cheap hostel accommodation, with common washing and cooking facilities, probably supplemented with nutritious meals-on-wheels from centralised cooking facilities.

  • 2. John Brown

    (31 August 2012, 12:19PM)  Complain about this comment

    We are now post-industrial, and to a lesser extent post-technological, which probably ought to be reversed. France has realised this, cutting the working week to 35 hours.
    Here, we keep many young people unemployed, and work older experienced people to death, often subjecting them to appalling commuting conditions in a transport system that is very inadequate.

    Recession and austerity is forecast to last till 2020, and we should plan for it, and not against it.

    Encourage the conversion of empty city centre premises to cheap hostel accommodation, with common washing and cooking facilities, probably supplemented with nutritious meals-on-wheels from centralised cooking facilities.

  • 3. John Brown

    (31 August 2012, 12:21PM)  Complain about this comment

    contd.
    Slightly lengthen the working day (say +1.5 hrs.) and shorten the week to 4 days, in three overlapping alternatives, Mon-Thurs, Tues-Frid, Wed-Sat for those without kids. Commuters stop 3 nights in hostel. Add occasional broadband home-working to the mix, and travel is further reduced.

    This would triple the capacity of rail and motorways at a stroke, avoiding expensive long-term investment that may not be properly exploited.

    Stress is lowered, tourism encouraged, heavy haulage easier. Nutrition is better, avoiding the obesity/diabetes epidemics, and young people are encouraged to try for a city-centre job. Commuters spend longer with their families, and have spare time not travelling, to keep up to date in their fields. We would work cleverer, and not longer.

  • 4. John Brown

    (31 August 2012, 12:21PM)  Complain about this comment

    contd.
    Slightly lengthen the working day (say +1.5 hrs.) and shorten the week to 4 days, in three overlapping alternatives, Mon-Thurs, Tues-Frid, Wed-Sat for those without kids. Commuters stop 3 nights in hostel. Add occasional broadband home-working to the mix, and travel is further reduced.

    This would triple the capacity of rail and motorways at a stroke, avoiding expensive long-term investment that may not be properly exploited.

    Stress is lowered, tourism encouraged, heavy haulage easier. Nutrition is better, avoiding the obesity/diabetes epidemics, and young people are encouraged to try for a city-centre job. Commuters spend longer with their families, and have spare time not travelling, to keep up to date in their fields. We would work cleverer, and not longer.

  • 5. John Brown

    (31 August 2012, 12:30PM)  Complain about this comment

    contd.
    Slightly increase the working day (say +1.5 hrs.) and decrease the week to 4 days, in 3 overlapping alternatives, Mon-Thurs, Tues-Frid, Wed-Sat for those without children. Commuters stop in hostel for 3 nights, reducing the weekly commute to 2 journeys. Add broadband home-working, and you can reduce on the hostel capacity, which has to run a surplus because of the overlaps.

    This would effectively triple the capacity of motorways and trains at a stroke. Oil imports are drastically reduced, and cars and train stock last much longer. Tourism is encouraged, and heavy haulage is easier and cheaper. Commuters spend longer daylight hours with their families, or alternatively study to keep up to date in their fields. The obesity/diabetes epidemic is avoided. Young people are encouraged to try for a city-centre job at low risk.

  • 6. John Brown

    (31 August 2012, 12:33PM)  Complain about this comment

    contd.
    The Japanese did it when their economy collapsed, with pre-fabricated plastic sleeping pods (Google "Japan sleeping pod"). These need up-sizing for larger UK bodies, but a high-ceiling warehouse could still support 2 levels. Not as cramped as sleeper carriages. Pay more, and you get a bigger pod, with room to stand.

    Why are politicians not coming up with these sorts of innovative solutions?

    If you have ever commuted and lived in B&B, as I have done, chasing the work, such hostels would be very attractive, and healthier than eating in the pub.

  • 7. Ace

    (31 August 2012, 01:50PM)  Complain about this comment

    Having had experience on working on business cases on large government infrastructure projects, none of Merryn's comments come as a surprise. In the past, HM Treasury investigated cost overruns and issued guidelines to overcome what they call “Optimism Bias”. I cannot paste the graph here but you can find it in the HMT Green Book. It is a very useful tool when applied correctly.
    Suffice it to say, where you have political interference combined with poor business cases, you get cost overruns and far less benefits than expected. I agree with Merryn, in that I have little doubt that the Chinese, and every other nation, suffer the same problems on such projects.

  • 8. Tom Jefs

    (31 August 2012, 08:58PM)  Complain about this comment

    Just like the short termists in the now disgraced City Merryn doesn't get infrastructure like she is clueless about the value of the Olympics.

    Much of Britain is like a giant sticking plaster going from one creaking and second rate industrial fiasco to another. Just look at the run down coastal towns and it is clear that gross underinvestment and poor, long-term urban and town planning has made the quality of life in the UK worse than it should have been.

    Just take any metro system in the developed world and I have yet to experience one worse than London. Long-term investment and planning is critical to both GDP growth and quality of life of the country. Only the short-term quarterly zombies and opportunistic politicians looking at the 5 year political cycle cannot reconcile that. They are a destructive and myopic menace like Merryn.

  • 9. John Brown

    (01 September 2012, 12:23PM)  Complain about this comment

    Tom Jefs,
    In normal times I would agree with you, particularly about the London tube. But the UK is now so deeply mired in both government and personal debt, that it is essential to demand value-for-money from any infrastructure investment.
    The Olympics have just cost me £400. Perhaps it is a showcase that could lead to more foreign orders. But I will get no other benefit from it. As I age, exercise is important to me, to raise my metabolic rate and avoid diabetes, to stay supple, and to lower my blood pressure. But the kind of exercise that takes place at the Olympics would just put me into an early grave, or damage my joints.

  • 10. John Brown

    (01 September 2012, 12:25PM)  Complain about this comment

    contd.
    And the whole sports physiology establishment, from school sports teachers to university researchers, is badly skewed to support competitive sports. The research on isometric exercises that have so dramatically lowered my blood-pressure is very thin on the ground, and not promoted by gymns or fitness instructors, or even my GP who relies on sports specialists for advice.
    Some infrastructure spending is a safe investment. Electrification of the existing Birmingham-London line is claimed to save energy, presumably because of regenerative breaking. It will clearly result in cheaper engines, and distributed traction units resulting in longer trains. It will provide flexibility in choice of initial power source (for example in contrast to LPG conversion), and better acceleration making more frequent trains an option.

  • 11. John Brown

    (01 September 2012, 12:27PM)  Complain about this comment

    contd.
    But a high-speed West Midlands line could just provide an alternative commuter corridor into London, overstretching the tube. It implies a decision by the government to keep London as the hub of manuracturing and commerce, which may not be the optimum solution in cost terms.
    There is far too little public analysis of the planning choices that infrastructure investment implies. Without it, I am inclined to agree with Merryn, because I will end up paying for this investment out of my meagre pension.

  • 12. Critic Al Rick

    (01 September 2012, 04:11PM)  Complain about this comment

    There should be no harm in spending on projects of whatever nature if they:

    a) pay for themselves quickly so as not to burden the Gross National Debt for long

    b) reduce the Balance of Payments Deficit permanently

    c) reduce the Budget Deficit permanently

    The (truly) Private Sector in the UK needs to be incentivised (encouraged) to participate in a drive towards creating greater self-sufficiency, i.e. less dependency on imports.

    Public funding after an initial kick-start could come from reduced unemployment benefits.

    I like John Brown's proposed scheme of a staggered 4-day working week.



  • 13. asocialdemocraticfuture

    (02 September 2012, 09:33PM)  Complain about this comment

    Merrlyn (along with her likewise usual sensible colleague Matthew Lynn) is missing half of the big picture on infrastructure. Investment in economic and social infrastructure directly influences future growth. But it must also be efficient in selection and execution terms, too. Merryn should be highlighting that, not arguing against infrastructure spending per se. Public investment, will fall by more than two thirds from 3.5% in 2009-10 to 1.1% to GDP in 2016-17. On its own efficient public infrastructural spending will not pull us out of recession; but if combined with current deficit reduction and a more strategic focused approach to growth it could help. Delaying the provision of needed new public assets will prove both more expensive and too late, and thus constrain the future potential growth rate of the economy. Additional public debt-financed investment will increase employment and reduce welfare payments, and thus the public current account deficit in the short term.

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