A new Governance Report shows the Swiss are top of the heap when it comes to finishing infrastructure projects, such as the Gotthard Tunnel, on time. Germany, which is far behind, has a lot to learn.
Switzerland is unveiling its new 57-kilometre Gotthard Base Tunnel through the Alps on June 1, a 17-year project that was finished bang on time.
Rail traffic is slated to start in December, a full year ahead of schedule, and the marginally over-budget project is seen as a textbook example of how to manage large-scale, long-term infrastructure projects. Infrastructure experts and public officials are taking a good look at how they did it. Europe is grappling with a backlog of sorely needed upgrades amid shrinking investment, which dropped 11 percent between 2010 and 2013.
If this trend continues, how will these countries maintain their bridges, roads and communications channels – let alone their economic competitiveness?
At the same time, an ever-widening web of stakeholders across sectors, levels of government and regions, together with complex funding structures like public-private partnerships for large infrastructure projects, have made such projects harder to manage and good results harder to come by.
In The Governance Report 2016, authors from the Hertie School and the Organisation for Economic Co-operation and Development clearly show that big spending is not an automatic recipe for high quality infrastructure, built on time and on budget. Good management and delivery of projects through better governance improves efficiency and keeps planners from underestimating risks and overestimating the benefits.
A profound factor in the success of the Gotthard tunnel was the wealth of expertise in managing such infrastructure projects – especially in tunnel construction. Both at the institutional level – from the federal audit office to the transport ministry, and on the ground, where civil engineer Renzo Simoni headed the company AlpTransit from 2008 until completion, experts in rail and tunnel construction were at the helm.
At the same time, the project was subjected to continuous financial oversight by a parliamentary review committee, which was responsible for evaluating and greenlighting additional costs. Constant assessment of the risks and funding needs over the project’s life-cycle meant that it was not a catastrophe when, in the mid-2000s, financial assumptions were deemed too optimistic. The government agreed to new funding in 2008. Parliamentary oversight then asserted pressure to curb spending and keep the project on budget – where it stayed for another 8 years.
A recent Hertie School study covering 165 large infrastructure projects in Germany found that the average cost overrun per project was 73 percent. Clearly, there is room for improvement. The much-maligned BER Berlin Airport, for example, is now more than four years overdue and almost double its originally estimated cost. BER fell short of many key governance requirements. Scrutiny of the project by a parliamentary committee was carried out only after the project was completed – a common practice in Germany. Managers lacked experience in constructing large airports, and the project already started to go awry when contracts were awarded early on. Due to their lack of expertise, those awarding contracts could not follow the “smart buyer” principle because they simply were not at eye-level with contractors.
Multi-tentacled projects such as these are hard to manage. But they do not have to fail. When good governance is in place from the beginning, managers can customize design and ownership to optimise risk allocation. They can align financing with expected cash flows or use milestone payments and contractor compliance monitoring to reduce financial risks and incentivise on-time, on-budget delivery. Such a system of penalties and rewards was used in reconstructing Berlin’s A115 “AVUS” highway in 2012 for example. The highway was completed in 18 months instead of the 30 budgeted, and cost 24 million euros instead of 28 million euros.
Infrastructure projects can cost less and be built more quickly than projected with good management from the earliest stages through contracting, construction and beyond to operation – a so-called life-cycle approach. This is the only way to assess and re-assess risks and engineer costs as they evolve over time, improve performance, address delays, and ensure high quality infrastructure. The right governance set up can improve efficiency in a world of shrinking financial resources. Without this, countries will not manage to capture the economic benefits of infrastructure spending. The alternative for many fiscally strained countries is a spiral of slow growth and accumulating debt.
Perhaps countries like Germany can take a page from project planner’s book: build institutions with a long-term strategic vision to oversee infrastructure investments, empower them to address the interests and needs of all decision makers and stakeholders, arm them with data and institutional memory to assess risks, and put oversight mechanisms in place. At both levels – policy and project, complexities are mounting, as is the demand for more efficient delivery of high-quality infrastructure. Spending alone won’t do the trick.
This article was originally published by Handelsblatt Global on 1 June 2016.