Megaprojects and risk
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Megaprojects and Risk: An Anatomy of Ambition is a book by Bent Flyvbjerg, Nils Bruzelius, and Werner Rothengatter dealing with the risks and legalities of promotion, policy, planning, and construction of megaprojects. Its central theme is that promoters of multibillion-dollar megaprojects systematically misinform lawmakers, the media, and the public in order to obtain construction approval for megaprojects.
As the authors observe, megaprojects, despite their actual and symbolic importance,, ‘have strikingly poor performance records in terms of economy, environment and public support’. This observation is backed up by empirical evidence showing that the studies used to justify transport megaprojects typically underestimate costs and overestimate benefits, sometimes by orders of magnitude.
The central task the authors set themselves is to investigate the processes behind the approval and implementation of megaprojects. The primary focus is on transport projects such as international transport links and urban passenger rail networks. Three case studies are offered: the Channel Tunnel; the Great Belt link between East Denmark and Continental Europe and the Øresund link between Sweden and Denmark.
The central thesis of the book may be summarised as follows: The typical ex ante evaluation of a large transport project is based on what the World Bank calls EGAP (Everything Going According to Plan). In practice, of course, things do not go according to plan. Occasionally, things go better than expected, as in the case of the Øresund road bridge, which experienced substantially more traffic than was expected. But, more often than not, things go worse than expected. Hence, the EGAP evaluation yields estimated benefit-cost ratios that are biased upwards.
The extent of this bias is startling. The authors find that real cost overruns of between 50 and 100 per cent are common, and overruns above 100 per cent are not uncommon, while demand is typically overestimated, with typical overestimates between 20 and 70 per cent. The tendency to overestimation is particularly severe in the case of urban rail projects. The average cost overrun for urban rail projects studied by the authors was 45 per cent, with 25 per cent experiencing overruns of more than 60 per cent. Meanwhile, the average ridership was half that estimated in ex ante evaluations, and 25 per cent of projects realised less than 30 per cent of the estimated ridership. Thus, the typical benefit-cost ratio actually realised was about one-quarter of the estimated value, with many projects performing even worse than this.
The core of the book is devoted to illustrating the central problem of over-optimism in ex ante evaluations, and discussing the characteristics of the policy process that generate systematic bias on the part of project proponents. The authors make a range of useful suggestions
In addition to the core point regarding overestimation of benefits, the book offers useful discussion of environmental aspects of the megaproject process, and of the costs and benefits of private provision of infrastructure.
As regards environmental issues, little has changed since the introduction of environmental impact assessments in the 1970s. Typically, these occur in the middle of the process, after the design phase, and before construction begins. The authors argue for more consistent attention to environmental issues beginning in the design phase and ending with ex post assessments of actual, as compared to predicted, environmental impacts.
In the 1980s, the poor performance of infrastructure projects was commonly attributed to public ownership and the associated potential for political concerns to override economics. Privatisation was commonly presented as a panacea. As the authors, observe, however, private provision of infrastructure solves some problems and creates others. Moreover, the complexity of the issues raised by transport megaprojects, including environmental concerns, planning implications and international negotiations is such that the idea of getting politics out of the process is chimerical.
Their conclusion (p. 104) is so carefully balanced as to give no comfort to either side of the debate. ‘Whilst far from offering a panacea to the risk and accountability problems for megaprojects, given an appropriate and properly implemented institutional framework, private involvement may be helpful’.
This conclusion is reinforced by the equivocal example of the Channel Tunnel, one of the three main case studies. This was a BOOT (Build, Own, Operate and Transfer) project, with a lease initially set at 35 years. Cost overruns and demand shortfalls substantially reduced the viability of the project. While much of the risk was borne by private investors, the project was salvaged only because the British and French governments agreed to a longer and more favorable lease. Unless governments are prepared to allow projects to fail outright, privatisation leaves them in the position of guarantors, bearing substantial risk for no returns. More generally, the willingness of governments to let a project fail, an enterprise close down, or a service be withdrawn is a good test for the viability of privatisation.
