At a time when the provincial and federal governments plan to spend hundreds of billions in new roads, bridges, transit and other crucial infrastructure, a recent paper by the University of Toronto’s Matti Siemiatycki explains why public megaprojects too often cost much more and take much longer than promised. It also offers five solutions Siemiatycki thinks can reduce the number of infrastructure projects that disappoint the public by costing much more than promised.
Siemiatycki found that cost overruns can’t be blamed only on technical challenges inherent in complicated building projects. Perverse incentives around government-funded infrastructure often leads the people involved to be overly optimistic or dishonest when it comes to estimating the money and the time needed to get things built. Further, the errors keep repeating themselves.
“The solutions I’m proposing are meant to provide incentives at the political level, at the corporate level and at the civil service level. So they’re targeted to different people,” he said in an interview with TVO.org.
Better data and information sharing
“The world is in the midst of a big data and analytics revolution,” the report says. But it’s one that the world of infrastructure has yet to catch up to, according to Siemiatycki.
A self-described “sports nut,” Siemiatycki naturally uses a baseball analogy to explain the disconnection between new information-gathering technology and infrastructure projects. “When they’re picking who the left fielder is going to be for the Blue Jays, they have a ton of data. And they’re running complex models to figure out what is this person’s future potential and what is their likelihood of performance and what are the variables that make them successful or not. When it comes to infrastructure, it’s almost like we’re flying blind.”
Governments don’t even collect and share the detailed data needed to run statistical models that would help them estimate cost, he says. Siemiatycki’s paper recommends cities start collecting extensive data on all infrastructure projects over a certain dollar threshold in categories such as cost, schedule, firms involved, location, reasons for cost escalations and schedule delays and construction quality. Over time, the data would provide insight into which kinds of projects are more likely to go over budget and which construction firms have a better record on delivering in terms of cost and quality.
“Considering how much information is coming in, we just never have collected and collated it in a way that can be analyzed systematically,” Siemiatycki says.
Reward good performance
It’s common sense to reward businesses with a good track record. But apparently that doesn’t happen enough when it comes to awarding infrastructure contracts.
Siemiatycki’s report points out places such as Hong Kong and Singapore that have formal prequalification systems so infrastructure companies that have performed well in the past get extra points when they submit bids for future work. “Such prequalification systems give all firms an incentive to deliver projects on time and on budget and meet their quality targets on each job,” the report says.
“Although such systems have been used to drive up the quality of infrastructure procurement, in Canada they are commonly designed so that as long as a firm meets the minimum standard required, it is eligible to bid for a government construction job.”
Teach bureaucrats better project management
Overseeing a multi-year, multi-billion dollar megaproject is complicated. It involves managing bid processes, writing effective contracts, mediating disputes between project partners and more. So cities should make sure their staff has the skills needed to do the job right..
One example is the British government’s decision to respond to a history of poor megaproject management by creating the Major Projects Leadership Academy. “Senior government staff members in departments that oversee major infrastructure projects in the United Kingdom are required to have completed the Leadership Academy program.”
Siemiatycki notes that proper training adds a cost to already cash-strapped governments, but argues the investment is well worth it.
Estimating the final cost of infrastructure can be difficult. But innovative techniques have been developed in other parts of the world that produce more accurate project budget estimates.
One approach is using “optimism uplifts” for transportation project cost estimates. This essentially means comparing the budget estimate on a new project to similar completed projects. For example, Siemiatycki says, if an estimate suggests a new rail line will cost $10 million per kilometre but other recent rail projects came in at $20 million a kilometre, it’s likely the estimate is unrealistic.
“State of the art now in terms of forecasting is combining an internal view with an outside view, because what you’re trying to do is say ‘how realistic, how reasonable is my forecast?’ Let’s try to control for the fact that there’s going to be optimism in my numbers,” he says.
Make selective use of public-private partnerships
Private-public partnerships, or P3s, are where the government enters into an agreement with a private company to finance, build and sometimes maintain a piece of infrastructure. When maintenance is involved, the contract can last decades. The Confederation Bridge to P.E.I. and Ontario’s Highway 407 are two examples of infrastructure built through P3s.
Siemiatycki says P3s basically act as an insurance policy. Governments pay more upfront in exchange for adding cost certainty and making the private partner take on some of the financial risk. And there is evidence that this is true. Siemiatycki’s report cites a study commissioned by Infrastructure Ontario that concluded that of 30 P3s delivered by the agency since 2007, 29 were completed under budget and 22 opened on time.
But he finds that P3s work only in certain cases. The high costs of structuring and executing a P3 means they are worth the effort only for projects with budgets of more than $50 million. He also argues P3 arrangements should normally just involve the design and building phases of a project. Siemiatycki says multi-decade maintenance and operation agreements mean the sum a company needs to finish the project gets larger and the interest payments that it passes on to the government get higher. “That’s when these projects get really expensive,” he said.
Will governments adopt some of these recommendations? Siemiatycki notes that the stakeholders involved in megaprojects have traditionally been unwilling to upend the status quo because it obscures the frequency of cost overruns and makes it harder to pin responsibility on someone when a project goes south.
But he’s optimistic, in part because the federal and provincial governments have promised to spend so much money on public projects. He says they will have special incentive to make sure taxpayers see that as money well-spent.
“I think those governments are recognizing that they’ve basically tied their wagon to infrastructure,” he says. “They’ve gotten sort of the boost from the announcement, and now they have to deliver.”
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