Sunday, April 17, 2011

Megaprojects and Risk

The text below is from Chapter 1 of the book "Megaprojects and Risk: An anatomy of Ambition," by Bent Flyvbjerg, Nils Bruzelius, and Werner Rothengatter (Cambridge University Press, 2003). For notes and references, see the book. Flyvbjerg's website.

Wherever we go in the world, we are confronted with a new political and physical animal: the multi-billion dollar mega infrastructure project. 

In Europe we have the Channel tunnel, the Øresund bridge between Denmark and Sweden, the Vasco da Gama bridge in Portugal, the German MAGLEV train between Berlin and Hamburg, the creation of an interconnected high-speed rail network for all of Europe, cross-national motorway systems, the Alp tunnels, the fixed link across the Baltic Sea between Germany and Denmark, plans for airports to become gateways to Europe, enormous investments in new freight container harbours, DM 200 billion worth of transport infrastructure projects related to German unification alone, links across the straits of Gibraltar and Messina, the world’s longest road tunnel in Norway, not to speak of new and extended telecommunications networks, systems of cross-border pipelines for transport of oil and gas, and cross-national electrical power networks to meet the growing demand in an emerging European energy market.

It seems like every country, and pairs of countries, are in the business of promoting this new animal, the megaproject, on the European policy-making scene. And the European Union, with its grand scheme for creating so-called “Trans-European Networks”, is an ardent supporter and even initiator of such projects, just as it is the driving force in creating the regulatory, and de-regulatory, regimes that are meant to make the projects viable.

The situation is similar in industrialised and industrialising countries in other parts of the world, from Asia to the Americas. There is, for example, Hong Kong’s Chek Lap Kok airport, China’s Quinling tunnel, the Akashi Kaikyo bridge in Japan, Sydney’s harbour tunnel, Malaysia’s North-South Expressway, Thailand’s Second Stage Expressway, and proposals for an integrated Eurasian transport network. In the Americas there is Boston’s “Big Dig”, freeways and railways in California, Denver’s new international airport, Canada’s Confederation bridge, the São Paulo-Buenos Aires Superhighway, the Bi-Oceanic highway right across South America from the Atlantic to the Pacific, and the Venezuela-Brazil highway. Even a proposed US$50 billion project to link the USA and Russia across the Bering Strait---the “biggest project in history”, according to its promoters---is not missing in the megaproject scheme of things.

Outside the field of transport infrastructure there is the Three Gorges dam in China, Russia’s natural gas pipelines, the Pergau dam in Malaysia, flood control in Bangladesh, the Bolivia-Brazil gas pipeline, the Venezuela-Brazil power line and, again and everywhere, the ultimate megaproject, the Internet with associated infrastructure and telecommunications projects.

Zero-Friction Society

Megaprojects form part of a remarkably coherent story. Sociologist Zygmunt Bauman perceptively calls it the “Great War of Independence from Space”, and he sees the resulting new mobility as the most powerful and most coveted stratifying factor in contemporary society. Paul Virilio speaks of the “end of geography” while others talk of the “death of distance”.

Bill Gates, founder and chairperson of Microsoft Corporation, has dubbed the phenomenon “frictionless capitalism” and sees it as a novel stage in capitalist evolution. When Microsoft and Gates single out a concept or a product one is well advised to pay attention. “Frictionless society” may sound as an advertiser’s slogan. It is not. The term signifies a qualitatively different stage of social and economic development.

In this development “infrastructure” has become a catchword on a par with “technology”. Infrastructure has rapidly moved from being a simple precondition for production and consumption to being at the very core of these activities, with just-in-time delivery and instant Internet access being two spectacular examples of this. Infrastructure is the great space shrinker, and power, wealth and status increasingly belong to those who know how to shrink space, or know how to benefit from space being shrunk...

Megaprojects are central to the new politics of distance because infrastructure is increasingly being built as megaprojects. Thus the past decade has seen a sharp increase in the magnitude and frequency of major infrastructure projects, supported by a mixture of national and supra-national government, private capital and development banks

The Megaprojects Paradox

There is a paradox here, however. At the same time as many more and much larger infrastructure projects are being proposed and built around the world, it is becoming clear that many such projects have strikingly poor performance records in terms of economy, environment and public support. Cost overruns and lower-than-predicted revenues frequently place project viability at risk and redefine projects that were initially promoted as effective vehicles to economic growth as possible obstacles to such growth.

The Channel tunnel, opened in 1994 at a construction cost of £4.7 billion, is a case in point with several near-bankruptcies caused by construction cost overruns of 80 percent, financing costs that are 140 percent higher than those forecast and revenues less than half of those projected (see chapters 2-4).

The cost overrun for Denver’s US$5 billion new international airport, opened in 1995, was close to 200 percent and passenger traffic in the opening year was only half of that projected. Operating problems with Hong Kong’s new US $20 billion Chek Lap Kok airport, which opened in 1998, initially caused havoc not only to costs and revenues at the airport; the problems spread to the Hong Kong economy as such with negative effects on growth in gross domestic product. After nine months of operations, The Economist dubbed the airport a “fiasco”, said to have cost the Hong Kong economy US$600 million. The fiasco may have been only a start-up problem, albeit an expensive one, but it is the type of expense that is rarely taken into account when planning megaprojects.

Some may argue that in the long term cost overruns do not really matter and that most monumental projects that excite the world’s imagination had large overruns. This line of argument is too facile, however. The physical and economic scale of today’s megaprojects is such that whole nations may be affected in both the medium and long term by the success or failure of just a single project. As observed by Edward Merrow in a RAND study of megaprojects:

Such enormous sums of money ride on the success of megaprojects that company balance sheets and even government balance-of-payments accounts can be affected for years by the outcomes...The success of these projects is so important to their sponsors that firms and even governments can collapse when they fail.

Even for a large country like China, analysts warn that the economic ramifications of an individual megaproject like the Three Gorges dam “could likely hinder the economic viability of the country as a whole”. Stated in more general terms, the Oxford-based Major Projects Association, an organisation of contractors, consultants, banks and others interested in megaproject development, in a recent publication speaks of the “calamitous history of previous cost overruns of very large projects in the public sector”. In another study sponsored by the Association the conclusion is, “too many projects proceed that should not have done”. We would add to this that regarding cost overruns there is no indication that the calamity identified by the Major Projects Association is limited to the public sector. Private sector cost overruns are also common...

In consequence, the cost-benefit analyses, financial analyses and environmental and social impact statements that are routinely carried out as part of megaproject preparation are called into question, criticised and denounced more often and more dramatically than analyses in any other professional field we know.

Megaproject development today is not a field of what has been called “honest numbers”. It is a field where you will see one group of professionals calling the work of another not only “biased” and “seriously flawed” but a “grave embarrassment” to the profession. And that is when things have not yet turned unfriendly.

In more antagonistic situations the words used in the mudslinging accompanying many megaprojects are “deception”, “manipulation” and even “lies” and “prostitution”. Whether we like it or not, megaproject development is currently a field where little can be trusted, not even – some would say especially not – numbers produced by analysts.

Finally, project promoters often avoid and violate established practices of good governance, transparency and participation in political and administrative decision making, either out of ignorance or because they see such practices as counterproductive to getting projects started. Civil society does not have the same say in this arena of public life as it does in others; citizens are typically kept at a substantial distance from megaproject decision making.

In some countries this state of affairs may be slowly changing, but so far megaprojects often come draped in a politics of mistrust. People fear that the political inequality in access to decision making processes will lead to an unequal distribution of risks, burdens and benefits from projects. The general public is often sceptical or negative towards projects; citizens and interest groups orchestrate hostile protests; and occasionally secret underground groups even encourage or carry out downright sabotage on projects, though this is not much talked about in public for fear of inciting others to similar guerrilla activities.

Scandinavians, who like other people around the world have experienced the construction of one megaproject after another during the past decade, have coined a term to describe the lack in megaproject decision making of accustomed transparency and involvement of civil society: “democracy deficit”.

The fact that a special term has come into popular usage to describe what is going on in megaproject decision making is indicative of the extent to which large groups in the population see the current state of affairs as unsatisfying...

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