Delays on government infrastructure projects: what’s the deal?

Feb 11, 2020

Written By David Carnes

The UK has been grappling with a number of huge infrastructure projects across the country, including the HS2 railway and a number of hospital new builds. What are the implications when these projects get delayed?

The term “infrastructure” means an asset or system that is crucial for the maintenance of important social functions. Examples include metro railways, power plants, telephone networks, roads, water supply and schools, among other assets. Although building major infrastructure projects requires a high initial investment, they carry the advantage of relatively low operating costs and years or even decades of tangible benefits.

The general consensus is that the UK’s infrastructure has fallen behind, due to a combination of project mismanagement and long years of neglect. Furthermore, recent efforts to redress this problem have been characterized by grand ambitions in planning and mishap after mishap in execution. Indeed, the UK Infrastructure and Projects Authority has concluded that at least 46 of more than 130 public infrastructure projects now underway are either failing or at risk.

“Too Big to Fail”?

Politicians in democratic countries are naturally inclined to support showcase projects because of the media coverage that these projects generate, not to mention the jobs that such projects bring to their districts, regardless of whether they are feasible or whether they benefit the nation as a whole. Meanwhile, the more mundane aspects of maintaining a liveable environment, such as mending potholes in existing roads, tend to be ignored.

The preferences of private investors, whom the UK has increasingly relied on to fund infrastructure projects, is the opposite of the preferences of politicians. Private investors are typically more willing to invest in the improvement of existing infrastructure because of the relatively modest marginal cost, while they are far more hesitant to invest in new projects that have to be built and financed from the ground up.

Once enough money has been invested in an infrastructure project, it tends to move forward on its own momentum. Each new injection of funds or postponement of a milestone seems preferable in the short term to admitting failure and abandoning the project. The end result is often a monstrosity that is abandoned years too late, or a completed project that cost far more than what would have been acceptable if it had been anticipated in the beginning.

Oversight of infrastructure projects

The National Audit Office (NAO) is a theoretically independent government agency with responsibility for auditing the activities of public entities. Its jurisdiction includes government infrastructure projects such as Crossrail and HS2. Currently it is responsible for the oversight of the Government Major Projects Portfolio, a collection of 133 major government infrastructure projects with a total value of over £400 billion.

Other government entities with oversight authority include the National Infrastructure Commission, which advises the Government on infrastructure needs, and the Infrastructure and Projects Authority, which operates as a centre of expertise for major infrastructure projects. Among these, the Infrastructure and Projects authority is probably the most powerful, while the NAO enjoys the most independence from the rest of the Government.

The NAO has criticised many of the major infrastructure projects for lack of accountability and transparency, poor planning, and underinvestment of resources. The now-defunct Public Administration Committee recently investigated these criticisms and issued a report containing an evaluation of NAO criticisms, along with recommendations on what steps to take to address these concerns.

Private oversight

The Institute for Government, by contrast, is a private think tank that relies on various sources of funding from both domestic and international sources. It is currently investigating the reasons for the UK’s poor performance on infrastructure projects, and it is preparing its own recommendations for improvement. Its report is expected to focus on deficiencies in infrastructure decision making, financing options and leadership.

The collapse of Carillion: the canary in the coal mine?

Carillion plc, the UK’s second-largest construction company, shocked the nation when it collapsed in January 2018 under a mountain of debt. Carillion employed 20,000 people in the UK, and it was involved in a multitude of major infrastructure projects (among other activities) including the Battersea power station, the HS2 railway and the Aberdeen bypass.

Carillion had recently suffered a series of setbacks on major projects, including cost overruns and delays in the construction of the Royal Liverpool University Hospital, the Midland Metropolitan Hospital, and the Aberdeen Western Peripheral Route. Construction companies like Carillion routinely operate on razor-thin profit margins due to intense competition and public bidding, which sometimes renders them too fragile to survive.

The subcontractor’s dilemma

The victims of Carillion collapse include more than just Carillion’s 20,000 employees. Carillion’s supply chain included up to 30,000 subcontractors, many of which will never see a dime of the money owed to them. Following Carillion’s collapse, insolvencies among building firms spiked by 20 percent, further weakening an already shaken construction industry.

While the possible insolvency of the general contractor during a project in a calculated risk that every subcontractor faces, a general contractor doesn’t have to collapse in order to drive a subcontractor into insolvency. Unexpected project delays can leave these firms without the cash flow to meet day-to-day operational needs, resulting in a “death spiral” that can finish off an otherwise healthy firm with astonishing rapidity.

Community effects

Do large infrastructure projects create jobs in host communities? Yes they do, and they also create mass layoffs if a project collapses. The resulting instability can be enough to severely damage the economy of a small community that plays a sizeable role in the construction of a major infrastructure project. This risk is not fully appreciated by many of the politicians who attempt to attract ill-considered infrastructure projects to their districts.

If all else fails, blame Brexit... Political rhetoric aside, however, the UK’s Brexit chaos has exerted a very real effect on infrastructure projects of all sizes. As of late 2019, construction work on infrastructure fell to its lowest level since the 2009 financial crisis. Most of the effect is attributed to government indecisiveness and a business climate that has been chilled by Brexit-related political uncertainty.

Case studies

Following is a hall of shame that details the delays and budget increases of a handful of major UK infrastructure projects:

The HS2 railway

HS2 is a planned high-speed rail line that is designed to connect London with Birmingham, Manchester and Leeds, among other destinations. Estimated costs have spiraled upwards from an initial estimate of £55.7bn to current estimates of up to £88bn. Given the track record of budget estimates so far, many observers speculate that the ultimate total cost might approach double the original estimate.

Phase 1, from London to Birmingham, was originally scheduled to be completed in 2026, but has now been delayed to 2031. Full completion of the system, originally contemplated for 2033, hs been delayed until 2040. Although the delay has been blamed on “challenging ground conditions”, critics allege that the ultimate reason for the delay is overoptimistic projections that failed to fully take into account likely contingencies.

Crossrail

Crossrail, the planned trans-London rail line, is already £2bn over budget (to £17bn) and over a year late. At this point no one, not even Crossrail Limited’s CEO, can say when the line will finally be ready for passengers. Meanwhile, the Crossrail project is costing about £30m a week. An investigation into the causes suggest mismanagement, low productivity and lack of coordination among subcontractors as the culprits.

An ad hoc approach to appeasing political sensitivities is also evident. Even as construction and testing delays mounted, the planned opening date of December 2019 was not changed until the schedule became so tight that meeting original expectations would have resulted in unacceptable safety compromises. David Higgins, former chair of HS2, stated that “People will forget about these problems when it’s open.” Only time will tell.

Edinburgh Trams

The Edinburgh Tram, a 14 km tram line between York Place and Edinburgh Airport, is an example of the perils of setting a goal without sufficient attention to the process of achieving it. Project costs ballooned from an initial estimate of £375 million to a final toll of £776 million, and the tram system opened four years late. The financial disaster has been compounded by the £200 million in interest that must be paid on a long-term loan taken out by the Edinburgh Council to cover project funding deficiencies.

On the bright side, project milestones were completed on time from late 2012 onward, and several extensions are already being planned. It will be interesting to see whether the mistakes of the past can be avoided this time around.

The NHS National Program for IT

Infrastructure includes not only highly visible public works such as roads and bridges, but also “invisible” systems such as information and IT resources. One such system, or so it was planned, was the NHS patient record system, which was set to become the world’s largest civilian IT system. In 2013 the project was abandoned after it triggered tremendous financial losses.

The system was conceived of as a centralised patient e-record system, and its original budget was £3.6 billion. The project ended up costing more than £10 billion, which would have been discouraging even if it had been successfully completed. The abandonment of the project, however, rendered the effects little short of catastrophic.

Considering the system’s abysmal performance during trial runs (the loss of thousands of patient records and delays in urgent treatment cases, for example), the project’s abandonment, catastrophic as it was, could be seen as a rational decision to limit losses that would otherwise have resulted in nationwide chaos.

The Cumbria nuclear power station

The Cumbria nuclear power station was a planned addition to energy infrastructure that would have supplied about seven percent of the UK’s total electricity needs. The abandonment of the project was triggered when Japanese partner Toshiba pulled out after having lost £400m on the project. Even pro-nuclear lobby spokesman Tim Yeo admits that the failure is a “crushing blow” to the hopes of a revival of the UK’s anemic nuclear energy industry.

The New Royal Liverpool University Hospital

The Royal Liverpool University Hospital project is planned as a 13-story, state-of-the-art redevelopment of the existing hospital, to be built right next door to the original site. The project is now expected to be completed in 2022 -- five years late. Total cost overruns from its initial budget of £335m are yet unknown, but are expected to be significant. The delay has been blamed on a variety of problems including structural deficiencies, asbestos and even inclement weather.

Conclusion

The high expectations that some entertained for the Public Private Partnership have failed to materialise, at least in part because of the vulnerability of private companies to insolvency and cash flow deficiencies. Although the slow degradation of the UK’s vital infrastructure continues—Britain’s infrastructure ranking has now fallen to near the bottom of the G7—a concerted effort to learn from the past can prevent history from repeating itself.

Commercial Insights