Poor governance costs mega-projects

As tenders roll in for the NSW government’s $8 billion north-west rail link project, experts warn that insulating the fledgling project from the massive cost overruns and delays dogging countless other infrastructure mega-projects will demand rigorous governance structures, put in place right from the outset.

“Governments and their private sector partners have in recent years allowed haste to get in the way of good project governance and risk management. Whether it’s in the rush to kick-start economic stimulus measures or to urgently backfill overdue infrastructure priorities, fundamental checks and balances have been neglected. As a result, many projects are backfiring with spectacular consequences,” said Rob Knox, director of global business and risk consulting firm, Protiviti.

Indeed, NSW is witnessing the ‘train wreck’ that is the Waratah train project, now at serious risk, following a succession of missed delivery dates and over $440 million in cost blowouts.

In Victoria, the desalination plant is running $3 billion over budget and the myki transport smartcard system has already cost taxpayers $1.3 billion—$350 million above original estimates. The corporate sector has been equally vulnerable, with a litany of multi-billion dollar resource construction projects behind schedule and over-budget.

Knox commented that mega-projects such as these were particularly in need of strong governance structures and controls given the sums at stake and the complexity of the deals.

“Typically, there are large numbers of parties involved—numerous financiers, owners, contractors, managers and operators—so the allocation of responsibilities and accountabilities can be highly unclear. Complex engineering or technical elements in the construction process can also create execution difficulties. Add to that, executives without their eye on the ball, and right away, you have a project at high risk of running aground,” he said.

Knox advised that best practice governance begins with a robust feasibility analysis and business case conducted at the outset. The business case needs to be revisited at every stage in the project lifecycle where there had been a major change in underlying assumptions.

For example, if the procurement stage revealed errors in original cost estimates, the business case should be reviewed. Also critical to the process was board oversight and approval of every major change, to ensure the project still made business sense in light of any scope changes or cost-cutting.

“Regardless of the model used to deliver the infrastructure, both the government and any private sector parties, need to invest the time in developing a solid initial business case based on sound assumptions. The design and engineering elements also need to stack up, too often, short-cuts are taken,” said Knox.

“If organisations want to take the accelerated route which is not generally advisable, they need to manage expectations—appropriate contingencies need to be factored into anticipated costs.”

Know said getting the governance framework right upfront should be a priority for any large infrastructure project. “Once it goes off the rails, the organisation’s ability to influence outcomes becomes far more limited. Your only options may be to cut scope, use cheaper inputs or pull the plug altogether. Either way, you’re left with a massive hit to the bottom line and very angry taxpayers and investors.”

He added that all was not lost, however. “The much anticipated North-West rail link presents the O’Farrell government with an opportunity deliver a first-class project for NSW. Acting early by establishing good governance foundations will be an important investment in future success.”

Red flags for infrastructure projects

• Large number of parties (finance conglomerates, multiple contractors, joint owners, managers, operators)
• Complexity of the deal—may involve innovative or complex engineering, design or technology elements
• Project sponsors lacking the time to properly oversee the project
• Lack of clear accountabilities for the project
• Poor corporate culture such as existence of ‘mavericks’ who flout policies and procedures
• Contractors and project managers without a track record of success
• Poor project governance structures such as lack of solid business case analysis, critical phase reviews (for example, at the procurement and subsequent phases in the project lifecycle) and board oversight of all material changes
• Insufficient contingencies