By Susan Muldowney, May 1, 2015
Bent Flyvbjerg’s Iron Law of Megaprojects states they will run over budget and over time, over and over again. How can it be beaten?
Bent Flyvbjerg, professor of major program management at Oxford University’s Saïd Business School, has spent much of his career studying the progress of such large-scale, complex ventures. He sees the Sydney Opera House drama as the most intriguing example of his Iron Law of Megaprojects – that giant projects run over budget, over time, over and over again.
“It had a 10-year delay, a 1400 per cent cost overrun and there was a law in parliament that every time the budget went up 10 per cent, the project needed to go back to parliament to be reapproved. You can imagine how many times reapproval was sought with a budget overrun of 1400 per cent,” Flyvbjerg says with a laugh. “It became a huge political scandal.”
Flyvbjerg has based his Iron Law on hard numbers. Research shows no improvement in megaproject delivery in the 70 years for which data is available. The form of a megaproject is of no consequence to its success. Airports, defence projects, high-speed rail networks, even large-scale architectural projects have all fallen victim to the Iron Law.
In a world building ever more infrastructure, this is no longer a mere interesting academic observation. Governments and organisations across the world wrestle with it daily. How can they defeat it?
Megaprojects are called so for a reason. They’re colossal: price tags beyond US$100 billion aren’t uncommon. The John Grill Centre for Project Leadership at the University of Sydney estimated that there were more than 100 projects valued at A$1 billion or more, either under consideration, committed to, or in construction in Australia in 2012. In Asia, the numbers are far bigger still. If Flyvbjerg’s Iron Law continues to hold true, many are in for mega-trouble.
In Europe, the builders of the Channel Tunnel were skirting bankruptcy for decades before they began digging beneath the sea. Australia’s ongoing National Broadband Network (NBN) rollout began with a government willing to spend whatever it took, and now proceeds under a different government elected partly to rein it in. The US$400 billion Joint Strike Fighter project – running for 14 years and yet to deliver an aircraft – serves the interests of countries including the US, UK, Australia, Italy and Canada.
Yet complexity does not fully explain megaprojects’ problems. For that, experts look to human failings.
Where do the problems start?Deborah Hein, managing director and chief executive officer at the International Centre for Complex Project Management, based in Canberra, says problems often begin when backers over-commit to megaproject concepts in their early stages. That can lead to weak analysis of alternatives. “We generally don’t do the upfront planning that’s needed to lock the requirements down,” she argues. “So we spend a lot of time trying to contractually lock things in that should never be locked in because they’re absolutely guaranteed to change. But we’re also one of those species that wants to control everything.”
Project scope also changes over time. Nolan Bear, a retired cost engineer, has worked on megaprojects including the A$3 billion Andrew Forrest-led Murrin Murrin nickel mine, a notorious project in Western Australia that included a five-year legal battle. In Bear’s view, an overload of change can spill a project team into chaos.
"We haven't found a country that has the magic formula for how to deliver megaprojects successfully consistently" Bent Flyvberg“With smaller projects, you can maybe wrestle it back in with your heroes coming in to work 60 or 70 hours a week,” he says. “You may regain control, or maybe not, because there’s plenty of smaller projects that go bad. But you just can’t do it with a big complex project. Sack people, do what you like, you will not get it back in control.”
Megaprojects usually limp to completion with little or no process review. “The interesting thing is that often the people and organisations building these megaprojects don’t stop and look back and decide if it’s a success or not,” Flyvbjerg observes. “They just build them and don’t really study whether they’re profitable or not. It’s shockingly normal.”
Megaprojects are often sold as illusory, fix-all solutions. “The problem is that we want to eat the whole elephant, not just nibble on its ear,” says Hein. “Government is a good example. Instead of saying ‘let’s get as many homeless people off the streets of inner-city Sydney as we can’, they say ‘we’re going to solve the homeless problem in Australia’. So it goes from quite a potentially achievable outcome to trying to create world peace.”
McKinsey Global Institute estimates that global infrastructure spending will reach US$3.4 trillion by 2030. When you include megaprojects in fields such as mining, aerospace, defence and information and communication technologies, Flyvbjerg puts the conservative estimate at between US$6 trillion and US$9 trillion a year.
The management questionAs growth in complex projects increases, effective management becomes even more crucial. “If you classify something as complex or mega, there is a whole range of other things you have to be qualified and trained in,” says Hein. “You need to be an expert on people as opposed to cost schedule. You need to have a higher tolerance for risk. You need to be able to make decisions in a timely manner. You need to be able to understand the cultures of the organisations that you’re working. So, generally, the theory is you chuck your traditional project management out the window.”
Bear seriously questions the eligibility of a lot of megaproject leaders. “You have to look at these people, these captains of industry. Where did they come from? What’s their experience? What do they really know? What is their judgement based on?” he asks.
Flyvbjerg identifies two types of bad management in megaproject development – political and professional. “Megaprojects are political and often there’s huge political influence and political pressure for projects at the start and this shapes the decision-making process up front. After the project has started there may be poor management in the delivery, but that is actually less prevalent than poor political management.”
When done well, megaprojects can create employment, improve productivity, reduce production costs and provide great benefit to consumers. The Guggenheim Museum Bilbao was built to budget, was on time and has delivered its promised benefits. Flyvbjerg says that’s the result of good management. “The people who were in charge knew what they were doing. They were very experienced – not just the architect but also the client. They were very determined.”
But Bilbao is a rare megaproject success. And with an economic scale so great, megaprojects can have a truly damaging impact on entire economies when they’re done poorly. Problems during the opening weeks of Hong Kong’s Chek Lap Kok airport in 1998 caused economic damage estimated at 0.1 per cent of GDP.
Cost overruns and benefit shortfalls of up to 50 per cent are common, and those reaching beyond 50 per cent are not rare. This means that some megaprojects are simply unviable. This is Flyvbjerg’s view of Sydney’s A$1.6 billion Lane Cove Tunnel, which went into receivership in 2010, three years after opening. Despite predictions that up to 115,000 vehicles a day would use the route, the average daily traffic barely hit half that mark by 2010.
Don’t fall for the flim-flamSo where are the misjudgements coming from? Megaprojects rest on business cases, cost-benefit analyses and impact assessments, both social and environmental. Clearly these assessments are inadequate.It is often argued that if people always knew the real costs and benefits from the start, nothing would ever get built. But Flyvbjerg argues that the “ingrained habit” of underestimating costs and overstating benefits leads people to build the wrong projects. “[It] creates a distorted hall-of-mirrors in which it is extremely difficult to decide which projects deserve undertaking and which do not,” he insists.
And Hein sees something close to outright deception. “People basically say whatever needs to be said to get a project started,” says Hein. “So the bottom line is all we really want to do with a business case is start a project, because once it starts, no one stops it. Once you have sunk $500 million into an infrastructure project, people go ‘well, you may as well finish it’.”
But good governance is slowly being put into practice, he says. After all, the bigger the megaproject, the higher the fall for leaders when things go wrong. In 2010, BP’s then CEO Tony Hayward was replaced after the Deepwater Horizon rig blew up in the Gulf of Mexico, unleashing the worst oil spill in US history. BP was fined US$4.5 billion, and by 2013 had spent more than US$42 billion on various settlements. Flyvbjerg says such disasters are causing leaders to reconsider their megaproject delivery.
Legislation enacted after the collapse of Enron, such as Sarbanes-Oxley in the US which penalises deception, and other regulations that came in the wake of the global financial crisis, are prompting more prudent decision-making.
Hein adds that education is key to megaproject reform. “One of the struggles that we have is educating people around the philosophy that getting money out the door and getting projects started is a measure of success. We’ve got to get past that. The UK is a little further advanced on this than we are.”
A recent review conducted by the Victorian state parliament suggested government bodies should use similar projects as benchmarks to help identify unrealistic project costs and delivery time frames. It also recommended creating independent bodies with dedicated public infrastructure planning and procurement functions that operate at arms-length from government departments, including the treasury.
For Nolan Bear, the path to success for megaproject development is clear. “In a way it all comes back to professionalism. Professionalism says ‘I want the truth’. Professionalism says ‘I’m not going to tell lies’. Professionalism says ‘I want the best result for the community’.”
Big builds – who does it better?One theory suggests that authoritarian governments are better at megaproject delivery than democratic governments. “It’s called the hard state versus the soft state theory,” explains project management expert Bent Flyvbjerg. “Hard states are authoritarian states and they’re supposed to be better and more effective because they don’t have as many rules and regulations and it’s easier to dictate.” Soft states, the theory says, have more hoops to jump through, with more stakeholders and environmental and health and safety laws that are often more stringent.
"The problem is that we want to eat the whole elephant, not just nibble on its ear." Deborah HeinBut Flyvbjerg says the theory is not yet proven. “We haven’t found a country that has the magic formula for how to deliver megaprojects successfully, consistently.”
Infrastructure across AsiaUrbanisation and a growing middle class are increasing infrastructure investment across Asia. Bent Flyvbjerg from Oxford University’s Saïd Business School says China’s US$300 billion high-speed rail program is spectacular.
“No one has ever built that much rail so quickly. Certainly China is able to leverage resources to an extent that no other nation has done, but that’s not necessarily efficient – it’s just being able to spend a lot of money very quickly and that could be very inefficient. The high-speed rail network is a very conspicuous manifestation of [access] to funds. We don’t have the data to tell if it’s a success or not,” he says.
Julian Vella, partner and Asia-Pacific head of global infrastructure at KPMG, says that South-East Asia has a significant need for large-scale infrastructure. “The region is working towards a greater degree of economic integration, which in itself suggests a greater level of cross-border infrastructure project delivery.”
This requires megaproject developers to navigate across political borders, as well as the technical and financing issues.
“The Malaysia to Singapore high-speed rail project is a massive project that requires two countries to come together to agree on the best way of taking that project forward, beyond all of the technical issues,” says Vella.
The high-speed underground rail line between Hong Kong and mainland China is now 60 per cent complete. “It’s the only 100 per cent underground high-speed rail system in the world, constructed smack in the middle of downtown Hong Kong, which is very densely populated. It’s a really difficult project,” warns Flyvbjerg.
This article is from the May 2015 issue of INTHEBLACK.
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