Are the real costs of infrastructure rising?

[petagny]

John Kay wrote an interesting piece in the FT yesterday on the rising cost of public infrastructure ('Why do we need to pay billions for big projects?). The comments on the article add useful additional evidence from around the world. It's not always clear Kay is comparing like with like, but even allowing for this there appears to have been a steep rise in the real costs of public projects. The figures for London underground probably provide the best metric, although as one commentator says it is probably not fair to compare Crossrail with the 'tube' tunnels as it will carry full size trains. Even so, £620 million per km!

Is this a UK phenomenon or worldwide? A recent report by Infrastructure UK found that the UK was paying significantly more than the comparable countries in the rest of Europe and that the differences could not be entirely explained by the particularities of the country. One of the commentators on Kay's article points out that Singapore has recently paid £82 million per km for an underground rail system, suggesting a significant discount on London's Jubilee Line extension in the 1990s (roughly £220 per km in the prices of the time). We shouldn't forget the physical/engineering dimensions - ground conditions in the Thames valley are difficult and a large part of the cost of the Jubilee Line related to integrating new with existing stations (e.g. look at the complexity of Westminster station) - but even so...

My own suspicion is that modern performance management approaches are not particularly good at keeping the lid on the cost of major infrastructure and that they need to be supplemented by strong public investment management systems to ensure value for money. Is it coincidental that the UK has been seen as a leader in performance-oriented management and budgeting at the same time as infrastructure costs appear to have spiraled? John Kay has his own views on 'new public management', which I may come back to in another post.

Kay also points to the proposed second high speed rail track (HS2) as a potential cause for concern (a project I have discussed in other posts). One commentator asks whether the few minutes saved in being able to travel at 250mph compared to 180mph between London and Birmingham is really worth the additional cost. That's a question all UK tax payers should be asking!

http://www.ft.com/cms/s/0/4934f824-ead3-11e1-984b-00144feab49a.html#axzz24FxqISke

[Napodano]

Infrastructure productivity: How to save $1 trillion a year
by McKinsey Global Institute http://www.mckinsey.com/insights/mgi/research/urbanization/infrastructure_productivity and http://www.mckinsey.com/features/infrastructure

'Insufficient or inadequate infrastructure—and the resulting congestion, power outages, and lack of access to safe water and roads—is a global concern. Typically, the debate about the growing need for infrastructure focuses on whether financing is sufficient to meet it. But, in fact, there are clear ways to create more and better infrastructure for less.

Just keeping pace with projected global GDP growth will require an estimated $57 trillion in infrastructure investment between now and 2030. That’s nearly 60 percent more than the $36 trillion spent over the past 18 years, according to Infrastructure productivity: How to save $1 trillion a year, a report from the McKinsey Global Institute and McKinsey’s infrastructure practice. The $57 trillion required investment is more than the estimated value of today’s infrastructure. And this figure does not include costs such as clearing maintenance backlogs, meeting development goals in emerging countries, and making infrastructure more resilient to climate change. But given widespread fiscal constraints in the wake of the global financial crisis, even assembling the minimum investment required to meet growth predictions is a challenge.

Yet practical steps could boost productivity in the infrastructure sector—a long-time laggard—by as much as 60 percent, thereby lowering spending by 40 percent for an annual saving of $1 trillion. Over the next 18 years, this would be the equivalent of paying $30 trillion for $48 trillion worth of infrastructure.'

[petagny]

This is a thorough and useful report, full of interesting examples of international good practice. As the authors freely admit, the recommendations for boosting productivity in the infrastructure sector are nothing new:

'By scaling up best practice in selecting and delivering new infrastructure projects, and getting more out of existing infrastructure, nations could obtain the same amount of infrastructure for 40% less...Achieving these productivity gains will not require groundbreaking innovation, but merely the application of established and proven practices from across the globe.

'The potential to boost productivity is so large because of failings in addressing inefficiencies and stagnant productivity in systematic way. On the whole, countries continue to invest in poorly conceived projects, take a long time to approve them, and then don't make the most of existing assets before opting to build expensive new capacity.'

The main opportunities for achieving increases in productivity are identified as:

1) Improving project selection and optimising infrastructure portfolios using transparent, fact-based decision making, and not always looking for solutions in physical infrastructure to meet clearly defined needs.

2) Streamlining delivery, including: speeding up approval and land acquisition; investing more heavily in early stage project planning and design; and adopting design-to-cost principles where these can be applied.

3) Making the most of existing infrastructure assets by boosting asset utilisation, optimising maintenance planning and expanding the use of demand-management measures.

The interesting question is why these well known approaches are not more ingrained in country systems. The report goes on to identify governance systems as critical to exploiting these opportunities, identifying 6 common characteristics of effective infrastructure governance systems:

* Close coordination between infrastructure institutions
* Clear separation of political and technical responsibilities - getting the balance between politicians and technocrats right.
* Effective engagement between the public and private sectors
* Trust-based stakeholder engagement
* Robust information upon which to base decision making
* Strong capabilities across the infrastructure value chain.

Creating effective governance systems with these characteristics is the real challenge!