Megaprojects and Risk

May 30th, 2014 atam Posted in Building, General | 2 Comments »

Recent news is that the cost of developing the West Kowloon Cultural District has ballooned to such an extent that the money is now enough to cover only the first two of three phases of the project. There are also news about cost overruns at various major infrastructure schemes, from the boundary crossing to the Express Rail Link.

These cost overruns are typically blamed on rising construction costs, but don’t be fooled. The title of this post is in italics because it’s actually the name of a book by Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter (Cambridge University Press, 2003).

In the course of researching the book, the authors studied almost 150 major infrastructure projects around the world. Cost overruns, they discovered, were widespread. “The difference between actual and estimated investment cost is often 50-100%, and for many projects cost overruns end up threatening project viability.”

Rejoice – Hong Kong is not alone then. Alas, the authors also revealed that the real cause of cost overruns is not what our government would like us to believe. The main cause, according to them, is the “inadequate deliberation about risk and lack of accountability in the project decision-making process.”

Let me quote a bit more: “Accountability is low, and politicians who underestimate costs in order to have projects approved are rarely in office when actual viability can be calculated, if it ever is. Contractors and others with special interests in major projects are also eager to have their proposals accepted….Uncertainty in estimating viability is related in this way not only to the innate difficulty of predicting the future but also to power and interests. If the authorities responsible for project development and decision making fail to take this into account, namely if they do not develop the necessary institutional checks and balances for project appraisal, the risk is that the wrong projects are implemented.”

So here’s a question: who was in power at the time this book was published – round the time Hong Kong was suffering a downturn triggered by SARS – who decided to pump-prime the economy by launching a whole series of major infrastructure projects? Once a project has been approved by LegCo based on total cost that is pulled out of thin air, it enters the “damned if you do, damned if you don’t” stage of development, where taxpayers have no choice but to pay for it to the bitter end, whatever the cost overrun, since abandoning it would be a waste and a cause of huge contractual claims. It’s no good scapegoating other parties for it; someone in power’s playing dice with taxpayers’ money.

2 Responses to “Megaprojects and Risk

  1. Where does the profession of Quantity Surveying fit into this story? Is there a professional code of ethics governing the estimating of a project’s costs? When a plane crashes, the reasons are thoroughly studied and the findings published. Is it quantity surveyors who would do that in the case of a projects whose costs exceeded estimates?

  2. According to the authors, estimates are typically based on the ‘EGAP’ principle, as in “everything goes according to plan”; rather than the ‘MLD’ principle that the authors proposed, which stands for “most likely development”. If you factor out all downsides – no bad weather, no poor ground conditions, etc etc – then you get a cost estimate that looks very nice.

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