Thursday, June 20, 2024

Budget blowouts and delays: why the UK struggles with infrastructure

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The 359,000 pages of planning applications and £800mn spent on the Lower Thames Crossing would suggest that construction for the new 14-mile road and tunnel to the east of London was well under way.

But the plan to build the first east London crossing of the Thames river in 60 years is yet to win final approval, and the estimated cost of the project has soared to nearly £9bn. While supporters say the road is urgently needed to alleviate congestion, it remains unclear whether it will ever be built.

Matt Palmer, the man tasked with delivering the LTC, is a veteran of contentious British infrastructure projects. Despite a delay announced by the government last year to postpone spending, he hopes approval will be granted in June for work to start in two years, ahead of a planned opening by 2032. But he admits it’s “not yet a done deal”.

The tribulations faced by the LTC are far from unique in the UK. A country once renowned for world-beating railways, bridges and water systems is now a case study in how not to build infrastructure.

“We are faced with the stark reality that if you want to build infrastructure of any kind, whether it be reservoirs, roads, trams or tubes, it will cost you more to build it in the UK,” the Treasury acknowledged in a white paper last year.

The question is why.

Convoluted contracting and outsourcing

Like giant Russian dolls, modern UK infrastructure projects contain a bewildering number of contractors, with multiple layers passing down cash and responsibilities, protected by complicated legal agreements.

Although formal responsibility for the LTC lies with the government-owned agency National Highways, the project has its own dedicated eight-person management team and 150 full-time staff. These include an external project manager, the US contractor Jacobs, which works alongside other consultants — Turner and Townsend, Cowi and Arcadis, who also manage the overall scheme.

Three other project managers — Balfour Beatty, Skanska and a joint venture between Bouygues and J Murphy & Sons — each oversee construction of different sections of the project.

None of these companies directly employ the bulk of the 22,000 staff who are expected to do the actual building and engineering of the LTC over its six-year construction period. Instead they focus almost exclusively on winning and managing contracts, and outsource the work to hundreds of smaller businesses that make up 86 per cent of the UK’s building and engineering workforce. Those businesses subcontract yet further.

“This highly transactional model often results in adversarial relationships with the supply chain, rather than integrative and collaborative ones,” said Juliano Denicol, director of the major infrastructure delivery MBA programme at University College London. “This is one of the leading causes of poor performance.”

In 2020, Denicol reviewed 6,007 academic studies on why megaprojects around the world exceeded deadlines and budgets. He found the UK model resulted in work being pushed further down the supply chain to contractors, subcontractors and sub-sub-contractors, some of which were on low margins. This constrained investment in innovation and management, sometimes leading to higher costs later, he added.

Noble Francis, economics director at industry body the Construction Products Association, said more consistent pipelines of work in countries such as France and Germany meant “you can have fewer larger contractors that directly employ construction workers”.

In the UK “the large gaps between major projects and the government’s tendency to constantly stop and start schemes means it doesn’t make sense for the contractors to develop and hire staff directly on permanent contracts, so they rely on specialist subcontractors to deal with the volatility in demand”, he said. “These are flexible but much more expensive.”

The delays between projects also make it “harder to make large, upfront investments in the skills, technology, new plant and equipment that would help raise construction productivity across the board”, Francis said.

In some cases, these problems are exacerbated by contracts that are ill-suited to the project. The controversial High Speed 2 railway — the northern section of which was scrapped by Prime Minister Rishi Sunak last year due to spiralling costs — used so-called cost-plus contracts. These pay for company expenses as well as a specified profit. This acts as a disincentive to keep control of costs, as the chair of HS2 Jon Thompson told lawmakers this month.

The LTC is using “target cost” contracts, in which any underspend is rewarded with additional profit. Palmer said this type of contract worked in part because it was a relatively simple project.

He defended the contracting process, saying the LTC needed “partners who have the right expertise and experience, whether that is an international firm who have helped build some of the biggest projects in the world, or a small business on our doorstep who know the local landscape”.

A computer-generated image of the proposed Lower Thames Crossing
A computer-generated image of the proposed Lower Thames Crossing © Joas Souza

Political interference

Like many projects, the cost of the LTC has risen — from between £5.3bn and £6.8bn when it was first agreed in 2019 to the current forecast of £9bn.

This was not entirely a surprise, said experts. “Over-optimistic” cost and timeframes are presented to the government in an attempt to win the Treasury and parliament’s approval and the price then soars when more detailed work is done.

Contractors play the same game, said Francis. They are so keen to win work on a high value project that they take on so-called winner’s curse contracts where they bid too low, he said. They then make up the margins when the government decides to pause projects or makes last-minute scope changes.

Delays and design changes also push up costs because often it is not worth disbanding teams while awaiting decisions. Teams can cost about £1.5mn a month to run even while a project is paused, according to the National Infrastructure Commission.

Political priorities can also be at odds with what is needed on the ground. It is not just that the projects are ambitious, “it’s also that politicians choose the wrong projects from the beginning”, said Alexander Jan, a former economics director at consultancy Arup. “Incremental improvements are often much better value but not politically sexy.”

Carl Ennis, chief executive of technology group Siemens in Great Britain and Ireland, said the UK tended to focus on centralised projects and decision making rather than smaller regional developments, as is the case in Germany.

“I’m not saying don’t do the big projects but it’s not the only way,” he said, pointing to the need for decentralised energy systems such as solar and wind farms for the electricity grid network.

The LTC’s Palmer fears that political will to sign off construction could dissipate ahead of the general election that looms this year. “Infrastructure in the UK is driven by political cycles,” he said.

Matt Palmer
Matt Palmer, who is tasked with delivering the Lower Thames Crossing, admits approval is ‘not yet a done deal’ © Charlie Bibby/FT

Planning delays

One reason for the hundreds of thousands of pages needed to get approval on the LTC is the UK’s convoluted planning process.

The development consent order regime for so-called nationally significant infrastructure projects was introduced in 2008 to streamline the approvals process by bringing all the necessary permissions into a single document, covering land acquisition and rights, the demolition or removal of buildings as well as permission to build and operate the infrastructure. 

But the process has struggled to cut red tape and in some cases has “clearly made things worse”, said Alistair Watson, head of planning and partner at law firm Taylor Wessing, who admitted that the “only people who benefit are lawyers and consultants”.

Just a third of the planning decisions made between 2021 and 2023 came in on deadline, according to official figures. The House of Lords built environment committee last year found it could take as long to get permission to build a project as it did to complete the work.

As projects become more complex and seek to mitigate uncertainty, the paperwork they generate has increased. “The volume of documentation slows down decision-making and reduces rather than increases transparency,” said Watson.

The need to consult affected residents and businesses also plays a role in delaying approvals, though he acknowledges that the people decried as “not in my backyard/Nimbys” often represent valid objections in a small country.

For example, the Thames Crossing Action Group, which is campaigning against the LTC, argues that the project will fail to reduce traffic and will tear through acres of historical woodland.

Palmer defends the need for engagement and public debate. The project’s extensive consultations across six boroughs will reduce the risk of expensive conflicts later, while its detailed planning means there is less chance of things going wrong late in the day, he said.

Despite the hurdles, Palmer believes that growing congestion on existing Thames crossings means the LTC will eventually get the go-ahead. “It has been a lengthy process, but the great thing is that we have taken people’s views on board, resulting in a better project,” he said.

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