Big vs small infrastructure projects: does size matter?

 

What are big and small projects?

Infrastructure projects fall into three categories: small, major, and ‘mega’. ‘Big’ projects are usually defined as those costing over £100m: This incorporates both major projects (over £100m) and megaprojects (over £1 billion), as defined by Professor Bent Flyvbjerg.

What differentiates megaprojects from other big projects?

Megaprojects have a tougher approval process than other big projects. They require joint approval from both the Treasury and the Infrastructure and Projects Authority. This is granted following scrutiny by a panel of experts from the public and private sectors, who form the Major Project Review Group.

How many economic infrastructure projects is the UK undertaking?

In the UK, the costs of infrastructure projects range from under £1million to almost £56 billion (for HS2). Based on our analysis of the Infrastructure and Project Authority’s infrastructure and construction pipeline data, we estimate that the Government has almost £550 billion of economic infrastructure projects – those covering communications, energy, floods, transport, and utilities – planned. The vast majority of these are small projects.  

The Government’s 23 megaprojects naturally constitute a disproportionately large amount of infrastructure spend: almost £150 billion. The three costliest of these represent particularly large and complex projects: Hinkley, the new nuclear plant; and the new Crossrail and HS2 rail lines.

What is the case for big projects?

They support bigger economic goals: One of the most attractive characteristics of big projects is the contribution they can make to high-level economic objectives. This includes boosting productivity, restructuring the economy and regeneration­ ­­- these were all cited in proposals for the HS1 and HS2 rail links, the Heathrow expansion and even Hinkley Point C. Some economists argue that this means big projects offer better value for money: for example, the wider benefits of HS1 were estimated to be £3.8 billion. Incorporating wider effects almost doubled the benefit–cost ratio from below 1 to over 1.7. Regeneration benefits, not included in the appraisal, were estimated to be £10 billion over the project lifecycle.

They make the UK more competitive post-Brexit: Big, innovative projects can also help countries build expertise, enabling them to become world leaders in particular technologies or areas. This has become particularly important in the context of Brexit. The independent Hendry Review cited this as a reason to support tidal lagoons, which it claimed had significant export potential. Subsequently, Welsh Assembly members united behind the Swansea tidal lagoon as a way of making Wales “a global leader in tidal lagoon technology and renewable energy”.

They are vote winners: Big projects can also be attractive to politicians, because they are perceived as vote winners. A photo in front of a new power plant looks better than one in front of an extended platform. However, the politicians who instigate big projects are rarely the ones who get to cut the ribbon, a point made by Bridget Rosewell, Commissioner at the National Infrastructure Commission, at our event on this topic.

What is the case against big projects?

They aren’t always as transformative as claimed: Transformative economic effects like regeneration are not always realised to the extent claimed. Even where they do appear, it is very difficult to attribute these to individual infrastructure projects, as they are usually part of a broader industrial or regional policy framework, as noted in the 2006 Eddington Review.

For example, the Public Accounts Committee have stated they are “unconvinced that regeneration at King's Cross is dependent on High Speed 1”, noting that little regeneration had occurred near HS1 stations outside of London.

It is much harder to change them: Big projects can be inflexible – they can usually be scaled up in size, but if demand falls, they cannot be made smaller (or at least not without significant expense). It is much easier to scale up small projects. This is a particular problem in nuclear, where there is a debate about whether large old-style baseline power solutions such as Hinkley may be inappropriate to a world in which energy demand is increasingly variable, and may decline in the future.

It is harder to predict costs, benefits and timelines: As big projects are often unique, it is harder to rely on lessons from the past. ‘Reference class forecasting’, a method for comparing new projects to previous ones to ensure estimates about costs and timings are as accurate as possible,  is difficult if a project is the first of its kind. Hence, benefit overestimates and cost underestimates are more likely for big projects. Internationally, nine out of ten projects costing over £1 billion go over budget.

Being riskier, they are more expensive to finance: If private capital is chosen to meet upfront costs, investors will demand a higher return for investing in riskier projects. Due to the level of investment required, there are also fewer parties willing to invest in such projects. Less competition for investment and demand for higher returns means that privately financed big projects will almost certainly have higher financing costs than small projects.

They are subject to a lot of opposition and delay: Big projects affect more people; they are likely to have a larger and more complex set of stakeholders and as a result invite more opposition. This can result in significant delays.

The Roskill Commission reported on expanding runway capacity in South East England in 1971 but almost 50 years later, planning approval for a new runway has still not been given.

What is the case for small projects?

They appear to have better benefit-cost ratios: Small projects will generally perform better on cost-benefit analysis. It is easier to conduct a thorough appraisal of a small project, because their impacts will be limited and usually geographically concentrated. This makes capturing costs and benefits in their entirety easier, and the benefit-cost ratios produced far less speculative.

Looking at Department for Transport data, the Eddington Review found that small projects generally deliver greater returns on investment than larger schemes. The report argued that the UK’s existing, well-connected transport network is sufficient; it is just performing poorly. The priority, it argued, should be to improve the existing network, rather than extend it or create a new one.

They can enable more accurate project appraisal: Delivering multiple small, homogenous projects can lead to more accurate prediction of costs and benefits. Highways England appear to have done this through their road evaluation scheme, which evaluates all major road schemes twice – one and five years after opening. They assess the extent to which expected benefits were realised, value-for-money was achieved, and cost estimates were accurate. This has allowed Highways England to predict the costs and benefits of new small roads projects with a much higher degree of accuracy.

Decision-making is more stable: Decision-making on smaller projects can also more easily be ‘depoliticised’ by leaving choices about what to prioritise to arm’s length bodies such as Highways England, Network Rail, or the Environment Agency.

What is the case against small projects?

They don’t offer the transformative potential of big projects: Small projects aren’t as transformational as big projects. Cost-benefit analysis only accounts for marginal benefits: it cannot offer a reliable guide to value-for-money for big transformational projects. The case for HS2 explicitly acknowledges this, noting that “the benefit–cost ratio methodology was not developed [for schemes] on the scale of HS2”. Perhaps then, small projects only outperform big projects on value-for-money assessments because these assessments are unable to capture the true value of big projects. Big projects are more of a gamble – but in some cases, the gamble pays off.

They are still subject to a lot of opposition: Small projects still face external battles. At our event, ‘Success in infrastructure: are bigger projects better?’, Isabel Dedring, former Deputy Mayor of London, noted that local opposition to small projects can be easily mobilised, in a way that is not the case for larger projects that may have more diffuse impacts. Small fracking projects, for example, have seen rural villages become the site of major opposition campaigns; this has forced companies to change their plans, and government to make policy changes. For small projects, the time and cost involved in engaging with and overcoming local opposition may be disproportionate to the project costs.

Update date: 
Wednesday, November 21, 2018