Project Complexity is Nobody’s Friend – Nordic Experience

Taxpayers pay for big investment projects by the government and the municipalities, and I thought that a short article on what I have learnt about these big projects from almost 45 years of experience would be interesting.

The exposure to risks in big complex projects grows almost exponentially as size and complexity grows. The main reasons are that most of the people involved are from big organizations, like banks, consultants, lawyers, engineers, accountants, etc. They expect to high levels of profits while believing that their risks are minimal.

Unfortunately, in these deals with so many big people in these big companies, things do not always work well, and here is why.

Complexity grows with size, and more complexity always means that effective control is harder to achieve because it requires coordination between all these people, an activity that seldom happens in a timely and systematic manner.

The person who is initiating a big, complex deal with his team, and later presenting the deal, will often under-estimate the risks – deliberately, but more often, inadvertently. They are generally younger, and seldom have “skin in the game”, except for their jobs. If they work in a bank, they can earn a lot of money with a few good deals because they generally get paid so well. If things go wrong much later, then there is no need to worry too much – they may lose their job but there are plenty of other banks… and who wants to talk about failure in their CV as the reason for leaving.

Top management almost never has much skin in the game for any single deal. If a deal goes bad, then there are always better deals in the portfolio. Most banks and companies just want to put pressure on staff to do the next profitable deal.

In any event, big complex deals are seldom controlled properly in big organisations by the most senior executives and the board. They seldom have folks who fully understand the true risks of deals, the mathematics of deals, the legal terms and conditions of signed contracts, or certainly very little about a deal’s complex engineering questions.

Another challenge is that you will always find boards that frown on dissent and open discussion, and this weakens any opposition to the next big deal from the quite less dominant thinkers in the group!

Let’s be clear, it is ever more difficult to assess future risks especially in complex deals and how the market, demand, competition, technology, etc., will look like in the future.

Let’s look at some examples….

TVO – Planning started around 1998 and construction of the turnkey project started in 2005 with completion planned for 2009 and cost or €3 billion. Now, it is still not delivered and the next possible completion date is 2023 and the total costs are estimated to be €5,5 billion for TVO and the same again for Areva!

Länsi-metro – this is an underground line linking Helsinki with its neighbour Espoo. Its two parts were each estimated to cost c.€400 million – the final cost for each one was c. €1,100 million and almost 5 years late…

Arlanda Express connects Stockholm and the airport… It cost many times more than any other railway line, with Salomon Brothers, their advisors, promising a huge 28% return on capital to investors. It was sold three times to various investors! The only reason why the government did not build it was because they thought government debt was too high! They ended with huge costs for expansion of motorway, increased investment in parking at airport due to lack of passengers, and big tax losses.

I estimated that the Lahti motorway cost the Finnish government in total service fees more than twice what they would have paid if they had procured the projects themselves. The E18 was estimated to have cost at least 30% more. In both cases service fees were high because it is obvious that people prefer motorways to narrow congested highways. The construction costs were also indexed in part on related specific earth moving equipment which the construction company basically controlled! A weak government and an under-resourced Transport Ministry were not an equal partner to a huge construction company with its army of engineers and lawyers. The public sector was naive in believing the altruism of the banks and consultants that Public Private Projects (PPP) are good for taxpayers.

One of the arguments for PPPs was that the government passes the project risks to the construction companies and banks …  However, we saw big cost over-runs and delays in all of the above projects. Furthermore, NIB and EIB were big lenders to all of the above projects and they are owned by the government! It is an ironic reality that PPP contracts were actually designed to minimise the risks to the construction companies – these contracts are generally thousands of pages long and needed dozens of lawyers to unravel their true meaning when things went wrong.

Governments and municipalities must have an independent and sufficiently competent team of professionals overseeing all major infrastructure projects. Without these people in sufficient numbers there is no way the public sector can get value for taxpayers.

Top bankers, financial consultants, engineers, and lawyers promoted PPPs in the media which earnestly believed in their benefits. Many politicians found nice jobs in these companies and banks while political parties received generous financial support and bankers were even seconded to the ministries to manage PPP projects!

The conclusion is that most big basic infrastructure deals are important and are best commissioned by a competent public sector with strong private sector players who do not have a monopolistic market share…

This article was first published in Forum for Ekonomi och Teknik in Swedish in November 2021

Site Footer