Rio, on track for an overspend of $1.5 billion, ranks only as a mid-level Olympic blowout. “That is frequently the problem with mega-scale infrastructure projects,” observes Claus Fintzen, CIO and head of Infrastructure Debt at Allianz Global Investors.
Mega-projects, those that cost more than $1 billion, always have the potential to be mega-disasters. Berlin’s Brandenburg airport is one famed embarrassment. Costs have quadrupled to €8 billion ($9 billion) and the futuristic airport remains unopened even though originally scheduled for 2012. Berlin’s farce is only an extreme version of the problems that plague many projects.
Nine out of 10 mega-projects, according to an international database compiled by
Bent Flyvbjerg from the Saïd Business School at Oxford University, fail in terms of cost overruns or benefit shortfalls, or are not completed on time. The Olympics, however, are in a class of their own.
In a recent study, Flyvbjerg and Allison Stewart, also of the Saïd Business School, found that
all Olympic Games, without exception, have cost overruns. The average is 156% in real terms and 324% in nominal terms; the highest average of any megaproject. In comparison, average major cost overruns for other projects are 20% for roads, 34% for large bridges and tunnels and 45% for rail. APPEAL OF INFRASTRUCTURE
In the search for steady, long-term yield, Fintzen says, institutional investors, such as pension funds and insurance companies, are increasingly
attracted to infrastructure as an investment class. By 2030, demand for global infrastructure investments could reach $53 trillion, according to the Organisation for Economic Co-operation and Development (OECD). Increased private-sector investment in strategic transport infrastructure will be essential, says the report.
“With 100% consistency in overspending, the Olympics are in a class of their own,” observes Fintzen. “This is why they will always be publicly funded. In projects involving private-sector investment, you can’t afford such overruns, but these projects can also quickly get into trouble if effective cost-control management is not in place.”
Public-private partnerships (PPPs) are an increasingly popular way for governments to plug infrastructure funding gaps. Used extensively throughout Europe in particular, they involve deals between public authorities and private investors where the private sector provides funding for construction and maintenance in return for a stream of future revenue. Risks, including budget and time plan risks, are typically shouldered by the private sector.
“PPPs tend to be more efficient as they involve third-party funders who control construction because they want to make sure a project is done on time and budget,” explains Fintzen. “Failure to do so directly hits the hip pocket and in extreme cases can involve the loss of the concession.”
In PPPs, funding is only paid at each milestone, which enables greater control by funders. Fintzen argues that such control does not generally exist in public projects. Yet, while alluring in an era of cash-strapped governments, PPPs can also fail when poorly designed.
EACH PROJECT ON ITS OWN MERITS
The London Underground Public-Private Partnership was a large, complex PPP to improve the underground transit infrastructure over 30 years. Under the deal that began in 2004, the government would operate the trains, and three private agreements with two concessionaires would maintain the Tube infrastructure, including the trains. By 2010, both concessionaires were bankrupt at a cost to the taxpayer of around £720 million ($800 million).
“Not all projects are of equal merit. You need to look at many factors,” says Fintzen. Allianz Global Investors has $7.5 billion invested in infrastructure in 12 countries throughout Europe and North America, including solar parks, toll roads and utilities. “The first is essentiality. Is it needed? If so, there is motivation for both partners to cooperate to find a solution should the project run into trouble.”
Other points considered include complexity, if the technology is established, and whether political factors are likely to see goals move during the project. This particularly plagued the
Hamburg Elbe Philharmonic Hall, which was slated to open in 2010 and is often mistakenly described in the media as a PPP. It is now scheduled to open in 2017 at a cost estimated to be €548 million ($610 million) higher than planned.
Indeed, Germany, a country once respected for its construction quality and world-class engineering, has taken a reputational beating in recent years. German governments, as well as those in neighboring Austria and Switzerland, are resistant to the use of alternative financing for infrastructure projects. Yet problems plague major high-profile public projects such as the Leipzig Tunnel, the BND foreign intelligence service headquarters, a €2.3 billion railway station in Stuttgart and the north-south subway tunnel in Cologne.