Megaprojects and Risk: An Anatomy of Ambition
2
A reprint from Joseph Coates Consulting Futurist, Inc. www.josephcoates.com Call 202-363-7440 or e-mail us at [email protected] Book Review: Megaprojects and Risk from Technological Forecasting and Social Change (Vol. 71, No. 5, June 2004) Page 1 of 2 BOOK REVIEW: Megaprojects and Risk: An Anatomy of Ambition Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter, Cambridge University Press, Cambridge, UK, 2003, 207 pages BY JOSEPH COATES This book documents beyond question that those who promote large- scale infrastructure and civil works projects running to billions of dollars, leave "Public and private investors, parliaments, media and the general public.. .routinely inadequately informed and misled regarding the risks involved in megaprojects" [1]. Having confirmed what we all know who follow the field, they go into overwhelming and convincing detail about experience in many countries and integrate earlier studies on the subject with their own. Flyvbjerg, Bruzelius and Rothengatter are, respectively, Professor in the Department of Development and Planning at Aalborg University, Denmark; Associate Professor at Stockholm University and a consultant in transport and planning; and Head of the Institute of Economic Policy Research, University of Karlsruhe, Germany. The situation is, at core, unchanged in the past 70 years. Their research shows that the situation is similar throughout the industrialized and industrializing nations, from Asia to the Americas. They examined the new Hong Kong airport, the Akashi Kaikyo bridge in Japan, the Sydney harbor tunnel, Thailand's Second Stage Expressway, the Boston "Big Dig," freeways and railways in California, the new Denver international airport, etc. The book is particularly relevant to the futurist community because all megaprojects when completed are around for a long time and are becoming more the fashion in infrastructure construction, and often, if not usually, involve mixes of national and international governments, private and public capital as well as development banks. Cost overruns are not the only aspect of the problem that they highlight. The failure of economic and social performance after the projects have been built is common. "The Channel tunnel, opened in 1994 at a construction cost of £4.7 billion, is a case in point, with several near bankruptcies caused by construction cost overruns of 80%, financing costs that are 140% higher than those forecast and revenues less than half of those projected…" [2]. Denver's US$5 billion new international airport"… was close to 200% in cost overrun and passenger traffic in the opening year was only half of that projected" [3]. The Major Projects Association, an organization of contractors, consultants, banks and others interested in megaproject development, has concluded that "too many projects proceed that should not have [been] done" [4]. Regional development claims for megaprojects are often merely a sop to promote political acceptance, and many of them depend upon "nonmeasurable or insignificant claims." The authors cite as a core factor, underlying all of these dreadful situations with megaprojects, the lack of transparency in decision making and the weak involvement of the civil society, or what they call a "democracy deficit." They make a big point of the failure to pay attention to risks and the lack of accountability in the project decision-making processes as a main source of difficulties. The authors' concept of risk is almost entirely limited to financial risk. Most megaprojects involve three features that are systematically ignored or underplayed: uncertainty about facts, high-decision stakes, and values in dispute. Risk assessment, essential to dealing with these factors, is usually absent or inadequate. In their own work, the authors emphasize three projects: the Channel tunnel, opened in 1994; the Great Belt link, opened in 1997 and 1998, connecting East Denmark with Continental Europe; and the Oresund link between Sweden and Denmark, which opened in the year 2000. They cite a study out of Aalborg University that looked at 258 projects costing approximately US$90 billion, 1995 prices. Some of their conclusions are the following: ß In 9 out of 10 transport infrastructure projects, costs are underestimated, resulting in cost overrun; ß For rail, actual costs are, on the average, 45% higher than estimated costs (standard deviation, S.D. = 38); ß For fixed links (tunnels and bridges), actual costs are, on the average, 34% higher than estimated costs (S.D. = 62); ß For roads, actual costs are, on the average, 20% higher than estimated costs (S.D. = 30); ß For all project types, actual costs are, on the average, 28% higher than estimated costs (S.D. = 39); ß Cost underestimation and overrun exist across 20 nations and five continents; it appears to be a global phenomenon; ß Cost underestimation and overrun appear to be more pronounced in developing nations than in North America and Europe (data for rail only); ß Cost underestimation and overrun have not decreased over the past 70 years. No learning seems to take place; ß Cost underestimation and overrun cannot be explained by error and seem to be best explained by strategic misrepresentation, namely, lying, with a view to getting projects started [5]. A snapshot of construction overruns from transportation projects is given in Table 1. One would think that with the worldwide experience in transportation projects, more realistic estimates would be the rule, not the exception. For the widespread failure in demand, i.e., use of forecasts, they cite seven reasons: inadequate methodology, often involving applying the wrong forecasting tool; poor database; discontinuous behavior and the influence of complementary factors;
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Transcript of Megaprojects and Risk: An Anatomy of Ambition
A reprint from Joseph Coates Consulting Futurist, Inc. www.josephcoates.comCall 202-363-7440 or e-mail us at [email protected]
Book Review: Megaprojects and Risk from Technological Forecasting and Social Change (Vol. 71, No. 5, June 2004) Page 1 of 2
BOOK REVIEW: Megaprojects and Risk: An Anatomy of AmbitionBent Flyvbjerg, Nils Bruzelius and Werner Rothengatter, Cambridge University Press, Cambridge, UK, 2003, 207 pages
BY JOSEPH COATES
This book documents beyondquestion that those who promote large-scale infrastructure and civil worksprojects running to billions of dollars,leave "Public and private investors,parliaments, media and the generalpublic.. .routinely inadequatelyinformed and misled regarding the risksinvolved in megaprojects" [1]. Havingconfirmed what we all know who followthe field, they go into overwhelming andconvincing detail about experience inmany countries and integrate earlierstudies on the subject with their own.
Flyvbjerg, Bruzelius andRothengatter are, respectively,Professor in the Department ofDevelopment and Planning at AalborgUniversity, Denmark; AssociateProfessor at Stockholm University anda consultant in transport and planning;and Head of the Institute of EconomicPolicy Research, University ofKarlsruhe, Germany.
The situation is, at core, unchanged inthe past 70 years. Their research showsthat the situation is similar throughoutthe industrialized and industrializingnations, from Asia to the Americas.They examined the new Hong Kongairport, the Akashi Kaikyo bridge inJapan, the Sydney harbor tunnel,Thailand's Second Stage Expressway,the Boston "Big Dig," freeways andrailways in California, the new Denverinternational airport, etc. The book isparticularly relevant to the futuristcommunity because all megaprojectswhen completed are around for a longtime and are becoming more the fashionin infrastructure construction, andoften, if not usually, involve mixes ofnational and internationalgovernments, private and public capitalas well as development banks.
Cost overruns are not the only aspectof the problem that they highlight. Thefailure of economic and socialperformance after the projects havebeen built is common. "The Channeltunnel, opened in 1994 at aconstruction cost of £4.7 billion, is a
case in point, with several nearbankruptcies caused by constructioncost overruns of 80%, financing coststhat are 140% higher than thoseforecast and revenues less than half ofthose projected…" [2]. Denver's US$5billion new international airport"… wasclose to 200% in cost overrun andpassenger traffic in the opening yearwas only half of that projected" [3].
The Major Projects Association, anorganization of contractors,consultants, banks and othersinterested in megaproject development,has concluded that "too many projectsproceed that should not have [been]done" [4]. Regional development claimsfor megaprojects are often merely a sopto promote political acceptance, andmany of them depend upon"nonmeasurable or insignificantclaims."
The authors cite as a core factor,underlying all of these dreadfulsituations with megaprojects, the lackof transparency in decision making andthe weak involvement of the civilsociety, or what they call a "democracydeficit." They make a big point of thefailure to pay attention to risks and thelack of accountability in the projectdecision-making processes as a mainsource of difficulties. The authors'concept of risk is almost entirely limitedto financial risk.
Most megaprojects involve threefeatures that are systematically ignoredor underplayed: uncertainty about facts,high-decision stakes, and values indispute. Risk assessment, essential todealing with these factors, is usuallyabsent or inadequate.
In their own work, the authorsemphasize three projects: the Channeltunnel, opened in 1994; the Great Beltlink, opened in 1997 and 1998,connecting East Denmark withContinental Europe; and the Oresundlink between Sweden and Denmark,which opened in the year 2000.
They cite a study out of AalborgUniversity that looked at 258 projectscosting approximately US$90 billion,
1995 prices. Some of their conclusionsare the following:
ß In 9 out of 10 transportinfrastructure projects, costs areunderestimated, resulting in costoverrun;
ß For rail, actual costs are, on theaverage, 45% higher thanestimated costs (standarddeviation, S.D. = 38);
ß For fixed links (tunnels andbridges), actual costs are, on theaverage, 34% higher thanestimated costs (S.D. = 62);
ß For roads, actual costs are, on theaverage, 20% higher thanestimated costs (S.D. = 30);
ß For all project types, actual costsare, on the average, 28% higherthan estimated costs (S.D. = 39);
ß Cost underestimation and overrunexist across 20 nations and fivecontinents; it appears to be aglobal phenomenon;
ß Cost underestimation and overrunappear to be more pronounced indeveloping nations than in NorthAmerica and Europe (data for railonly);
ß Cost underestimation and overrunhave not decreased over the past70 years. No learning seems to takeplace;
ß Cost underestimation and overruncannot be explained by error andseem to be best explained bystrategic misrepresentation,namely, lying, with a view togetting projects started [5].
A snapshot of construction overrunsfrom transportation projects is given inTable 1. One would think that with theworldwide experience in transportationprojects, more realistic estimates wouldbe the rule, not the exception.
For the widespread failure in demand,i.e., use of forecasts, they cite sevenreasons: inadequate methodology, ofteninvolving applying the wrongforecasting tool; poor database;discontinuous behavior and theinfluence of complementary factors;
A reprint from Joseph Coates Consulting Futurist, Inc. www.josephcoates.comCall 202-363-7440 or e-mail us at [email protected]
Book Review: Megaprojects and Risk from Technological Forecasting and Social Change (Vol. 71, No. 5, June 2004) Page 2 of 2
unexpected changes of exogenous factors; unexpectedpolitical activity or missing realization of complementarypolicies; implicit appraisal bias of the consultants; and finally,appraisal bias of the project promoters. Their conclusion is: donot trust traffic forecasts, especially for rail [6].
Table 1: Examples of construction cost overruns in largetransport projects
Project Cost Overrun (%)
Boston's artery/tunnel 196Humber Bridge, UK 175Boston-Washington-New York rail, USA 130Great Belt rail tunnel, Denmark 110A6 Motorway Chapel-en-le-Frith/Whaley Bypass, UK 100Shinkansen Joetsu rail line, Japan 100Washington Metro, USA 85Channel tunnel, UK, France 80Karlsruhe-Bretten light rail, Germany 80Oresund access links, Denmark 70Mexico City metro line 60Paris-Auber-Nanterre rail line 60Tyne and Wear metro, UK 55Great Belt link, Denmark 54Oresund coast-to-coast link 26
Constant prices; (p. 14 of Ref. [1]).
The authors are equally harsh in their analysis of the failureof environmental impact analysis, citing three generic causesof failure: a lack of accuracy in impact predictions; the narrowscope of impacts and their time horizon; and an inadequateorganization scheduling and institutional integration of theenvironmental impact assessment process into overalldecision making [7].
They also have harsh conclusions about the assessment ofenvironmental impacts. "The main obstacles to learning aboutactual environmental risks are the absence of mandatory,institutionalized requirements for postauditing and theindifference among authorities, developers and the generalpublic to such audits" [8].
A methodological note dealing with financial risk points outthat, "The failure to reflect the probabilistic nature of projectplanning, implementation and operation is a central cause tothe poor track record of megaproject performance. . ." [9].
The authors' recommendations sometimes seem sosimpleminded that one wonders why they even need to bestated. With regard to strategies for risk assessment, theyargue that the most-likely-development (MLD) principleshould be substituted for the everything-goes-according-to-plan (EGAP) principle [10].
The conventional approach to megaprojects is outlined in 17steps [11] and reformulated in 22 steps [12].
Laying out the lessons learned and the proposed remediesfor accountability, four instruments are proposed. These are(1) transparency; (2) performance specifications determinedby stakeholders; (3) explicit formulation of a regulatoryregime and identification and elimination of policy risks
before decisions are taken; and (4) the involvement of riskcapital as far as possible [13].
The book ends with extensive end notes, a long bibliographyof background material, and studies related to their own.
Unfortunately, they do not give enough attention to fourtopics. First is the extent to which the government agencies orthe legislatures responsible for agreeing and supportingprojects actually encourage being misled and receivingoutrageously inappropriate economic forecasts. This shouldinclude more on the psychology of institutional politics.
Second, not all projects come in over budget. Some come inright on budget and some fewer below the budget as are citedin the text. The authors devote no material at all to theconditions that put them on target, nor do they use those on orunderbudget projects to test their own remedies for improvedaccountability. Perhaps, they should do a supplement sincethey have all the data, to address this point.
Third, nonfinancial risks are ignored, leaving this readerpuzzled about whether they are so few as to be trivial, or theextent to which overruns are caused by them. They do notethat safety was a factor in the Channel tunnel overrun.
Fourth is the relationship of the authors' analysis to whatsome refer to as macroengineering projects, those massivelong-term projects likely to call for international approval andfunding. Examples are, towing Antarctic icebergs to dryregions, terraforming Venus, rerouting the north flowingrivers of Siberia and three score others proposed in the last 75years. Some recent concepts are discussed by Schneider [14].
An informative complement to the book under reviewespecially for urban planners and Americans is Altschuler andLuberoff's MEGA-PROJECTS: The Changing Politics ofUrban Public Investment. They see both continuity andsubstantial change in big urban infrastructure projects forreasons too numerous and complex to repeat here. Their noteson overruns generally concur with the book under review [I5].
Flyvbjerg et al.'s book is unequivocally recommended toanyone who has connections with the plan, design, analysis,funding, appreciation, approval, monitoring or operation ofmegaprojects.REFERENCES
[1] B. Flyvbjerg, N. Bruzelius, W. Rothengatter, Megaprojects and Risks: AnAnatomy of Ambition, Cambridge Univ. Press, Cambridge, UK, 2003, p.86.
[2] Ibid., p. 3.[3] Ibid., p. 3.[4] Ibid., p. 4.[5] Ibid., pp. 15-16.[6] Ibid., pp. 28-31.[7] Ibid., p. 49.[8] Ibid., p. 64.[9] Ibid., p. 73.
[10] Ibid., p. 80.[11] Ibid., p. 87.[12] Ibid., pp. 126-127.[13] Ibid., pp. 123-124.[14] S.H. Schneider, Earth systems: engineering and management, Nature 409
(2001 18 January) 4117-4421.[15] A. Altshuler, D. Luberoff, MEGA-PROJECTS: The Changing Politics of
Urban Public Investment, Brookings Institution Press, Washington, DC,2003, pp. 243-247.
