Government must learn from past project disasters
25 September 2007
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Research* published today by the Institute of Economic Affairs shows the enormous economic waste that has resulted from government involvement in major investment projects such as nuclear power, the Channel Tunnel Rail Link and the Millennium Dome. Some of these projects, such as nuclear power, are still ongoing and the government risks throwing good money after bad. All the projects were “quasi-commercial” in that the government was investing in order to obtain a return on its money. The study, by D. R. Myddelton**, Emeritus Professor of Finance and Accounting at Cranfield School of Management, also has important lessons for future ambitious government projects such as the 2012 Olympics.
The research examines six major projects that have taken place over the past 80 years and which have been supported by all main political parties. All have involved huge cost over-runs – of between 63% and 300%. Only one project, the Millennium Dome, was completed on schedule – the Channel Tunnel Rail Link is 13 years behind schedule. All the projects had shortfalls in demand for the product or service produced of at least 30%. For example, the demand for Concorde, on which nearly £10bn (in today’s money) was spent, was only 10% of that originally projected. The Millennium Dome cost twice as much as originally budgeted but received only half the planned income.
The government is continuing to back quasi-commercial schemes of the type analysed by the author. Myddelton said, “Politicians and officials must learn the lessons from these past failures. If they do not, future projects, such as the 2012 Olympics and Crossrail, will also be expensive, late and loss-making.” Specifically, the author recommends that projects include:
• regular reviews of projects focusing on latest estimates of the amount and timing of cash flows;
• up-to-date market research; and
• a “devil’s advocate” or “exit champion” to argue the case for abandonment at regular intervals and publish his evidence.
Before projects are undertaken, the government should ask itself:
• why the private sector will not undertake the project; and
• why the government thinks the project is worthwhile if the private sector does not?
*They Meant Well, Government Project Disasters by D. R. Myddelton, Hobart Paper 160, Institute of Economic Affairs, £12.50.
**D. R. Myddelton is Emeritus Professor of Finance and Accounting at the Cranfield School of Management, and chairman of the managing trustees of the Institute of Economic Affairs.
The research examines six major projects that have taken place over the past 80 years and which have been supported by all main political parties. All have involved huge cost over-runs – of between 63% and 300%. Only one project, the Millennium Dome, was completed on schedule – the Channel Tunnel Rail Link is 13 years behind schedule. All the projects had shortfalls in demand for the product or service produced of at least 30%. For example, the demand for Concorde, on which nearly £10bn (in today’s money) was spent, was only 10% of that originally projected. The Millennium Dome cost twice as much as originally budgeted but received only half the planned income.
The government is continuing to back quasi-commercial schemes of the type analysed by the author. Myddelton said, “Politicians and officials must learn the lessons from these past failures. If they do not, future projects, such as the 2012 Olympics and Crossrail, will also be expensive, late and loss-making.” Specifically, the author recommends that projects include:
• regular reviews of projects focusing on latest estimates of the amount and timing of cash flows;
• up-to-date market research; and
• a “devil’s advocate” or “exit champion” to argue the case for abandonment at regular intervals and publish his evidence.
Before projects are undertaken, the government should ask itself:
• why the private sector will not undertake the project; and
• why the government thinks the project is worthwhile if the private sector does not?
*They Meant Well, Government Project Disasters by D. R. Myddelton, Hobart Paper 160, Institute of Economic Affairs, £12.50.
**D. R. Myddelton is Emeritus Professor of Finance and Accounting at the Cranfield School of Management, and chairman of the managing trustees of the Institute of Economic Affairs.
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