Sizeable differences between sectors: Pioneer projects in the ICT- and energy sectors with extreme cost increases.
Berlin, 4 May 2015 – Public large-scale projects in Germany have proven, on average, 73 percent more expensive than estimated. Projects have varying cost overruns across sectors – the highest per project occurring in the ICT and energy sectors, with 394 percent and 136 percent respectively, followed by the defence sector with 87 percent. These are some of the key findings in a study by the Hertie School of Governance that will be presented in Berlin on 19 May.
The study, under the leadership of Genia Kostka, Professor of Governance of Energy and Infrastructure at the Hertie School, analyses the scale, patterns and causes of cost overruns in 170 large public infrastructure projects in Germany. Of those, 119 were finished between 1960 and 2014 and 51 are currently still under construction. The study revealed a 41 percent cost overrun related to the unfinished projects. For the 170 projects included in the study’s database, €141 billion was budgeted, but real costs went up to almost €200 billion. This equals a total additional cost of €59 billion. Kostka and her team found that these miscalculations resulted from faulty processes in the areas of decision-making, planning and management. Administrators and political leaders are often too optimistic and overestimate their own skills. This, for example, leads to decision-makers agreeing to contractual stipulations that burden public expenditure with risk or give companies false incentives.
The highest budget overruns were made by pioneer projects with high technological risks. Examples include IT projects – such as the failed taxation system FISCUS – and the construction of nuclear plants or offshore wind parks. “The start-up costs for new technologies are very high and come with substantial risks. Nevertheless, these investments can pay off in the long run because of learning effects and a competitive edge in technology,” said Kostka.
Another finding is that mega-projects accumulate, on average the biggest cost overruns: Projects with a budget exceeding 500 million Euros are on average twice as expensive as planned. With smaller projects (up to 50 million Euros) and medium-sized projects (between 50 and 500 million Euros), the study found that budgets were, on average, overrun by 78 and 59 percent respectively.
Lessons from Abroad
An international comparison of the findings is complicated by the lack of comparable data. Available studies seem to indicate that Germany does not perform well when compared to similar countries. In the Netherlands, budget overruns in road, rail, tunnel and bridge construction projects are at 17 percent, in other countries in north-west Europe they sit at 22 percent. In Germany, however, they are as high as 30 percent.
In order to better manage the budget compliance of large-scale projects in Germany, Kostka recommends, among other things, a national “sector based benchmarking” for projects and an independent, publicly-available database for large-scale infrastructure projects, following the example of the UK’s “Major Project Authority”.
The study “Large Infrastructure Projects in Germany – Between Ambition and Realities” includes, in addition to its in-depth analysis of project data, three detailed case studies on the Berlin Airport BER, the Elb Philarmonic and Offshore Wind Parks, which complement the investigation. Please find a fact sheet of the first study results here and the original German version here.
Members of the Press are warmly invited to the launch of the study (in German) on 19 May at 6.30 p.m. at the Hertie School of Governance, Friedrichstraße 180. In addition to a presentation by the authors, Martin Delius MdA, Chairman of the BER Parliamentary Committee of Inquiry, Heinz Dürr, businessman and former chairman of the board of the Deutsche Bahn, Mathias Oberndörfer, Head of Practice Group Public Sector at KPMG, and Andreas Wagner, managing director at German Offshore Wind Energy Foundation will discuss the key findings. The discussion will be moderated by Jobst Fiedler (Hertie School).
Press registrations and interview requests: pressoffice[at]hertie-school[dot]org.