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Monday, September 21, 2015

Are megaprojects worth the money?


By  Tom Bailey, September 21, 2015

Record levels of investment are being funnelled into megaprojects. Tom Bailey asks whether the transformative nature of such schemes can justify the exorbitant costs

The Channel Tunnel lorry terminal. The project was 80 percent over budget for construction

 Record levels of investment are being funnelled into megaprojects. Tom
Bailey asks whether the transformative nature of such schemes can justify the exorbitant costs

It is often said that the defining feature of humans – what separates humanity from the animal kingdom – is our manipulation and mastery over nature. Since the Neolithic revolution and the start of history, humans have, to varying degrees of success, attempted to re-craft the environment to their own ends, rather than be subject to the whims of nature. From the Bible designating the earth as man’s dominion, to Enlightenment authors such as Sir Francis Bacon encouraging humans to “put nature on the rack and extract her secrets”, the drive to control nature and gear it towards humanity’s ends has been a constant impulse.

Around the world, this sentiment seems to remain, with governments and businesses engaging in large construction projects altering the Earth and the way we traverse it, from high-speed rail changing how humans travel, to audacious canals and dams harnessing the power of water.

Let the steppes be trampled
With the start of the 19th century and the inauguration of industrial society, reaching its apogee in the 20th century, this impulse reached dizzying heights, in both theory and practice. To support the needs of emerging mass industrial society, and encouraged by constant technological and scientific development, large infrastructure projects were built.


The minimum spent on megaprojects per year

Following the Civil War, America criss-crossed itself with rail tracks – at no small human and financial cost – allowing for the movement of people and goods across its vast expanse. This was soon copied by the Russian Empire, which in the late 19th century completed its own rail network from one end of its sixth of the world to the other. In the 20th century, from the deserts of the American West, to Ghana’s Lake Volta and further east to China’s Yangtze River, huge dams were constructed, manipulating the natural flow of water, with an eye on improving humanity’s lot, be it through regulating water supply or providing electricity.

This impulse is perhaps best summed up by the Soviet writer V Zazurbin in 1926, when faith in human’s ability to reforge nature was perhaps at its peak: “Let the fragile green breast of Siberia be dressed in the cement armour of cities, armed with the stone muzzle of factory chimneys, and girded with iron belts of railways. Let the taiga be burned and felled, let the steppes be trampled.” Likewise, Zazurbin’s contemporary, the poet V Mayakovsky, once quipped, “After electricity I lost interest in nature. Too backward!”

The age of megaprojects
While the rhetorical flourish of earlier enthusiasts for such projects may now be absent, government bureaucrats with large plans and larger budgets, however, have not. We are, it seems, living in an age of the megaproject.

First, it is worth outlining what exactly a megaproject is. The word itself seems self-explanatory: some sort of large-scale construction project. The term, however, is a discreet label. The word megaproject first appeared, according to the Merriam-Webster dictionary, in 1976. According to Bent Flyvbjerg in a paper for Oxford University entitled What You Should Know About Megaprojects and Why: An Overview, they can be described as “large-scale, complex ventures that typically cost $1bn or more, take many years to develop and build, involve multiple public and private stakeholders, are transformational, and impact millions of people”.

One of the key characteristics of megaprojects, which the words of Zazurbin seems to have anticipated, is that they are they are transformational. They are ‘trait makers’ of a society or economy. As Flyvbjerg notes, “They are designed to ambitiously change the structure of society, as opposed to smaller and more conventional projects that are ‘trait taking’, that is, they fit into pre-existing structures and do not attempt to modify these.” Such projects are often viewed as infrastructure style projects, but can also include water and energy provision, industrial plants, space exploration, urban regeneration, as well as less material types such as IT systems.

These projects, then, are said to be dominant in our age. Total megaproject spending is assessed at $6trn to $9trn per year, which amounts to eight percent of total world GDP. According to The Economist, we are living through the “biggest investment boom in history”, estimating infrastructure spending in emerging economies at £2.2trn ($3.44trn) annually between 2009 and 2018. Likewise, McKinsey Global Institute claims that global infrastructure spending will be $3.4trn per year between 2013 and 2030, which would amount to roughly four percent of global GDP.

Alongside this, the amount spent is accelerating at break-neck speeds. Despite the rhetoric of industrialisation and modernisation that China’s Communist rulers espoused in the 20th century, “In the five years between 2004 and 2009, China spent more on infrastructure in real terms than during the entire 20th century, which is an increase in spending rate of a factor of 20.” Furthermore, China built as much length of high-speed rail track between 2005 and 2008 as Europe has in the past two decades.

To demonstrate the large scale of megaproject spending, Flyvberg makes a comparison to US debt to China, which is often viewed as an important and potentially destabilising aspect of the world economy. Megaproject spending is “the equivalent of spending five to eight times the accumulated US debt to China, every year”.

Geopolitical influences
Yet despite such a boom in spending for these transformative projects, many look upon them dispiritingly. Opposition to transformational infrastructure projects – what we now call megaprojects – is nothing new. In her Concise History of Germany, Mary Fulbrook notes, in reference to Germany’s massive construction of railways in the 19th century, “The Prussian King’s publicly expressed doubts about whether being able to arrive in Potsdam a couple of hours earlier really constituted a major contribution to human happiness.”

Moreover, according to Nancy Alexander, Director of Economic Governance at the Heinrich Boell Foundation, one major issue with » megaprojects is that the rationale behind these projects is not economic but geopolitical. “These megaprojects are driven largely by geopolitics”, she writes – rather than carefully considered economics. “The United States has begun to worry that its hegemony will be challenged by new players and institutions, such as the China-led Asian Infrastructure Investment Bank”, she continues. “In reaction, the Western-led institutions, such as the World Bank and the Asian Development Bank, are aggressively expanding their infrastructure investment operations, and are openly calling for a paradigm shift.”

The criticism, however, seems to miss the point. If certain megaprojects are indeed intended to make certain countries politically more powerful on the world stage, the questions begs how this is intended to do so. Outside of defence projects, the answer seems to be by increasing the economic power of the country, be it through increased manufacturing, transport or trade capacity, through the construction of large scale ports, industrial zones or plants to meet industry energy requirements, or extensive rail and road networks. Whether a country sees these as part of a plan to strengthen their state or simply create economic growth, the result is the same: more jobs, more trade and faster transport for citizens. For most megaprojects to pay geopolitical dividends, they must surely first present economic dividends.

Top 10 megaproject cost overruns
Defining success
One major problem with megaprojects is that they are notorious for their propensity to overrun in both completion and budgets. As Flyvberg notes, “Nine out of 10 such projects have cost overruns; overruns of up to 50 percent in real terms are common, over 50 percent are not uncommon”. Many famous megaprojects have faced serious overruns (see Fig. 1). However, in a table provided by Flyvberg, nearly exclusively, with the exception of four projects out of 32 listed with the highest overrun costs, all are located in economically developed nations. Once reason for this could be that such countries typically face more stringent regulation, both environmental and social. Tough planning laws, greater legal recourse and denser population mean opposition from those living in areas affected by megaproject construction costlier, resulting in the need for high legal costs. Likewise, more stringent environmental regulations can often slow down construction, as well as adding to legal compliance costs.

This suggests that overrun costs are not necessarily inherent to megaprojects, but rather to do with the political environment. European and North American countries have made a political decision – right or wrong – to enact legislation, which gives people legal recourse against megaproject constructions or various pieces of legislation. All of this amounts to extra costs in both direct terms but also in paying for legal experts to ensure all the rules are followed.

One case of such a project encountering overruns is the Channel Tunnel. The underwater tunnel connecting Britain and France was intended – and expected – to be profitable. The project, however, went 80 percent over budget for construction and 140 percent above for financing, while revenues have been 50 percent lower than expected. “The project has proved non-viable, with an internal rate of return on the investment that is negative, at minus 14.5 percent with a total loss to the British economy of $17.8bn; thus the Channel Tunnel detracts from the economy instead of adding to it”, wrote Flyvberg.

Yet despite being a financial failure in terms of generating a profit, the Channel Tunnel can be seen as a success in other ways. As a piece of technological engineering it is impressive, being one of the largest underwater tunnels in the world. Both symbolically and practically, it connects the UK to the rest of Europe, allowing for passengers to quickly and easily cross the English Channel.

Many major projects have been crippling overrun, yet we could not imagine the world economy without them. The Panama Canal overran by 200 percent, while Suez Canal in Egypt did so by an eye watering 1,900 percent – surely a great loss to all involved at time of construction. Yet these projects – as megaprojects are intended to be – were transformational. Panama, without its canal would surely not be home to one of the continent’s most impressive cities, Panama City, not to mention the obvious benefit of opening up a shipping route that cuts through the American continent. Likewise, by opening up shipping from the Mediterranean to the Indian Ocean, global trade without the Suez Canal seems unimaginable.

Megaprojects are transformative for economies. While they often overrun, this seems to be a trend restricted to areas where regulation is stronger – pushing up costs. And overrunning on costs does not indicate a megaproject itself as a failure; trait-making as they are, they can provide long-run foundations for economic growth. Indeed, while the term megaproject is relatively new, any major industrialisation pursued by an economy – the only sure-fire way to address poverty – has either relied on such projects, for instance railway building, or on the creation of large planned industrial zones. In and of themselves megaprojects are vital to both address present poverty and ensure the world’s continued economic prosperity.