Scandal of public sector cost overruns

Political crisis obscures how billions of pounds of taxpayers’ money is being (over) spent, writes Bill Jamieson

Why is it almost every public project undertaken across the UK today is stricken by delays and horrendous cost overruns? This week we learnt that the first phase of the long-promised High-speed Rail Link (HSL) between London and Birmingham will be delayed by up to five years and that the cost has rocketed from £62 billion to between £81bn and £88bn.

Were it not for the all-devouring drama of Brexit, the outcry over this debacle would be far louder than it is. For it is far from the only horrendous cost overrun to beset public major public projects.

Over the past ten years, cost overruns have totalled £17.2bn or £624 per UK household, with an aggregate completion date delay of more than 32 years.

Major project forecasts have been shown to be consistently optimistic in terms of both cost and time to completion and almost always take longer and cost more than expected.

What a salutary lesson for Chancellor Sajid Javid as he unveiled his latest spending review. The £17.2bn overrun could have paid for seven of the ten projects at their initial cost estimates – with £4bn left over for schools and social care.

“Optimism bias” barely begins to cover it. Multiple studies, concluded a recent analysis by the Taxpayers Alliance, have suggested that costs are intentionally underestimated to secure project approval, which means the potential for costs to overrun dramatically are greatly increased.

Major projects jinxed by overruns include Great Western Railway modernisation (initial cost estimate £1bn, latest estimate: £5.6bn); Cross Rail (initial forecast £15.9bn, latest estimate £17.8bn); the Astute Class submarine (initial estimate: £8.2bn, latest estimate: £10.2bn); and Thameslink (initial cost estimate: £5bn, latest estimate: £5.5bn). And Scotland has not been immune. We remember with a shudder the Sottish Parliament debacle (initial estimates: £10£40 million; final out-turn £414m) and the

horrendous Edinburgh trams project (five years late; initial cost estimate: £375m, final cost£776m,pl us £200 min interest charges on a 30-year loan).

To these can be added the Aberdeen Western Peripheral Bypass – initial estimate: £345m, latest estimate more than £745m. The project was first mooted in the 1950s, work started in 2003 after a public inquiry and failed legal challenge. But the project was dogged by problems, many outwith the control of project managers and the Scottish Government – pipe diversions, re-cabling delays, flooding and the collapse of the key project partner, Carillion. Balfour Betty and Galliford Try absorbed costs running into hundreds of millions of pounds, with estimates of the true cost overall now ranging over £1bn.

But why dwell on cost overruns? Are they not part and parcel of any project? Are we not often left with iconic, award-winning buildings, faster rail, better roads and less congestion?

And where is the homeowner who has not taken on a refurbishment or extension only to be hit by unexpected drainage problems, building snags, extra roofing

costs and the cascade of overlooked extras and conveniences added on as work progresses? Few take an initial builder’s estimate seriously: we are lucky to emerge with a final bill less than 30 per cent above the figure on which we signed off.

Yet we expect more diligence and accuracy on public service contracts. Public money demands to be spent wisely and with care. Teams of accountants are deployed in an attempt to ensure accuracy and that we are not left helpless in the face of a blizzard of unwanted bills for political pet projects. Such is the extent of cost overruns in many cases that it is clear these were due to factors that should have been identified at the beginning of a project – and certainly before funding had been approved.

And in some cases there is a suspicion that the public was kept in the dark as cost estimates began to overshoot. Back in April 2016, senior High Speed 2 official Andrew Bruce says he was set to reveal that costs of land and buildings to build the railway were far higher than HS2’S official estimate. But half an hour before he was due to deliver it, he was fired. “I was dismissed,” he claimed, “to stop the figures

that had been produced from going to the Department for Transport.”

A month later, then Chancellor George Osborne received a letter from Patrick Mcloughlin, the Transport Secretary at the time, in which he admitted that the first stretch of the railway was already £1bn over budget.

Now construction cost estimates can never be an exact science. But methodology and accountability can be improved: The Taxpayer Alliance paper suggests civil servants and decisionmakers are held more accountable and that bonuses paid to executives should be contingent on the successful execution of the project rather than on final size.

Finally, we should never be blind to the opportunity cost of horrendous cost overruns: the schools and hospitals that could otherwise have been built had costs been kept close to the initial budget.

Many now believe that the benefits of HS2 have been over-stated, that it will do little re-vitalise the north of England – never mind help business in Scotland – and that glitzy vanity projects should be set aside in favour of smaller projects that offer better value for money.