Monday, September 23, 2019

"Strategic misprepresentation" and HS2 Project

Economist Bent Flyvbjerg has a nice phrase to explain cost over-runs in many infrastructure projects, strategic misrepresentation. It refers to the motivation of project planners and promoters to over-estimate the benefits and under-estimate the costs of the project so as to ensure that the project gets approved.

In my opinion, the UK HS2 project is a very good illustration of strategic misrepresentation. Early this month, the project company announced that the project's bill had risen by £26 bn to £88bn, citing unanticipated costs arising from the line passing through porous salt-mines, chalky rubble and ancient woodlands. 
Sample this from an FT report,
Having committed to 50km of tunnelling on the route to Birmingham, partly to fend off angry Conservative voters in the picturesque Chiltern Hills, HS2 engineers found that digging through hundreds of different soil types was more laborious than they first thought. A crucial mis-step by the company appears to have been the failure to carry out extensive studies of ground conditions prior to the HS2 bill, which received parliamentary approval in 2017. Instead, estimates were derived from “desktop drawings . . . and without the benefit of any investigation of ground conditions or similar levels of detail across all areas of scope”, said Allan Cook, chairman of HS2. As a result, he added, the “stations, railway systems and integration plans are all less well developed than would be expected at this stage”. HS2 said it could not undertake extensive studies before the line was approved by parliament because it “didn’t yet have the legal powers to access land”.

But the ramifications of the omission are extensive. Several of the soils are soft and fine, requiring additional stabilising with concrete piles. The quick change in soil types along the route — there are more than 20 varieties along just one 20 mile stretch of the central section — is also causing difficulties. Additional time is also needed to let parts of the earth settle after “ground heave” — caused when the surface soil is removed, swelling the clay and potentially cracking bridges and tunnels. Critics argue that these costs could have been avoided had planners paid closer attention a decade ago to what lay in the path of the planned rail route... Former staff members, including Doug Thornton, one of the company’s six directors of land and property in the project’s first five years, say that HS2 had “absolutely no idea” how many parcels of land needed to be bought... the National Audit Office last year, which found that HS2 had severely underestimated property costs and that land and property owners were not being paid on time, causing substantial emotional and financial distress.
The report also points to corruption scandals at high levels within the project.

Clearly, the proponents of the HS2 project did what was required to get the project sanctioned. They knew at least four important things. One, given the fiscal constraints, a fully-loaded accurate budget would have decreased the likelihood of project approval. Two, once sanctioned and project announced, it becomes politically suicidal for the government to reverse course even if there is a cost-revision. Three, in case of mega projects like HS2, cost-escalation can be gradually phased in as the project execution progresses. Four, officials get transferred or retire and such decisions are diffuse, and accountability is therefore difficult to establish.

Apart from this, in projects with long approvals process between the project report being prepared and its approval and procurement, cost-escalation arising from mere passage of time is unavoidable. 

No comments: