Capital Gains

The headline reads: “Treasury asking ministers to draw up billions of pounds of infrastructure cuts”. The story, so far as it is a story rather than a Government fact-finding mission getting some unwanted attention, is to identify ‘quick win’ savings in capital projects planned for the next one- to two-years. There are a number of reasons why this might be necessary, including a mismatch between Government spending limits and inflation, and policy decisions made by both the previous and new UK Governments. But the question that interests me is not whether those reasons are valid or not (others much more qualified can debate that). Instead, I am interested in why public infrastructure projects are being targeted, and how those of us working in public sector capital projects can help to develop a more integrated view of the ways infrastructure supports policy.

Rachel Reeves, the chancellor, is quoted in the same story from her speech at the Labour Party Conference: ““It is time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits too. Growth is the challenge and investment is the solution.””

This is not a new idea, as anybody who has read about the USA ‘New Deal’ put in place by President Franklin D. Roosevelt between 1933-1938 will know. The New Deal was about economic relief from the Great Depression, which it manifested in part through investment in a huge range of public works, providing employment where it was most needed. (Of course, the New Deal wasn’t just about infrastructure, but involved a great deal of banking and monetary reform, as well as changes in labour relations.) The concept of public infrastructure investment as part of economic recovery has a long history.

Cutting capital projects is attractive for the same reason funding them often is: it’s a single item with no perceived ongoing implications. No staff need be laid off, no existing service needs to be cut. When funding is given it is attractive to governments for the opposite reasons: ongoing staff costs aren’t considered part of the bid so it’s a one-off cost, it is a new and therefore exciting thing, there will be a ribbon to cut. Two sides of the same coin and both in obvious error when you think about it. This disengagement between infrastructure and ongoing operations is at the root of many of the issues seen in many jurisdictions today.

My work for over a decade has been largely focused on how capital funding for public projects can be achieved, used to best effect, and managed within a context of real-cost reduction public sector budgeting. I am not an economist (this will be obvious to most readers) nor a political theorist. What I am is someone who has worked with heritage organisations, charities and the public sector in the UK and the Falkland Islands to try and leverage capital projects to greatest effect in contexts ranging from a major stonework repair project at Canterbury Cathedral to a small settlement on West Falkland in need of a renewable power system.

In this time I have formulated a menu of areas that need to be achieved for capital infrastructure projects to hold out any hope of achieving the promise they set out to achieve.

1. Unleash the potential of the construction phase. This is about understanding value, as well as cost. This is what Reeves claims to be doing, unlocking the value of infrastructure. Too often, however, the value is seen only in what will be delivered through the infrastructure - a new hospital, school, park, or rail service. This is not wrong, but it is reductive. During the Covid crisis, working with colleagues across the heritage sector we were able to demonstrate the enormous value of the construction workers, specialist craftspeople, hauliers, materials suppliers, insurance agencies, even local cafes, involved in a project. The construction phase of infrastructure projects is a measurable value. It is one that can, managed right, develop local businesses and expand training and skills opportunities, particularly for young people. It is an enormous, largely unseen, well of value.
2. Help develop contractors who can work with the public sector. This follows on closely from point one. Infrastructure contractors are as varied as any other industry, perhaps more. From architects to building firms to archaeological units to spatial planners, there will be one, or several ones, that’s right for your public sector project. But often the ‘failed’ projects I’ve been involved in have in large part failed because the contractors were not set up to work well with the requirements of public sector funding. For example, the use of standard public sector contracts is an advantage with those in the know, but depending on where in the world your contractor is from, and in particular which industry, they may never have used them before and be suspicious of how they will be managed. More prosaically, many contractors struggle with long decision-making timetables. No, I tell them, I cannot speed up that contract approval, it has to go to Executive Council and they don’t meet for two weeks. The public sector can be an intelligent client, but it also has a rigidity that the private sector can struggle with. Working to develop contractors who understand and work with public sector processes benefits everyone.
3. Consider risk and make it your friend. Most public sector bodies have remarkably low risk tolerances when it comes to public money. This is, of course, quite right. However, I have too often seen that risk adversity translated into contract and delivery terms that certainly contribute to project failure, even if they do not directly cause it. For example, what is the tolerance for variation orders on outline designs? Most public sector organisations would like to say ‘none’. The outline design should be turned into detailed designs without any variation from a quoted price. But how acceptable is that to contractors, especially when working with public sector clients who may not be experienced in infrastructure? A large part of the solution to this is contained in point two - help develop contractors who get the public sector context. But it is also about public sector project managers, project executives, and even elected members, re-thinking what risks they are willing to countenance. For every project that is delayed or even cancelled because it couldn’t get to contract, and even more importantly for every project that goes significantly over time, scope and budget, there is an opportunity cost that is very often also a risk. The cost of not doing something, or doing it poorly, is rarely calculated. But if you want and need infrastructure, and all the benefits of that, the risk of standing still should always form a counterpoint to the risk of taking a step. Risk is unavoidable, and whilst prudence is naturally paramount with money from public sources, that prudence should not be allowed to become a risk in itself.
4. Be honest. In the UK, which is where I have most direct experience of central and local government funding, the processes of bidding for public money very often do not encourage honesty. This isn’t a confession of long-term malpractice; it is a reflection that valuation systems such as net present value did not, when I worked on projects, for a key part of determining overall cost and value. Any attempt I make to explain NPV will undoubtedly not be as good as quoting from Wikipedia: NPV is “a way of measuring the value of an asset that has cashflow by adding up the present value of all the future cash flows that asset will generate.” Calculations like this can net off costs (including operating costs in some circumstances) against potential revenues - if there are any, which of course is not required of all public sector projects. These cash flows are calculated against the life of the asset and give a ‘real’ indication of the costs of operation. For example, would a particular type of building material, which is more expensive than the alternative, actually be cheaper because it lasts longer and therefore will not need as much maintenance? Encouraging a whole-life costing approach in public sector processes would result in bigger numbers (scary) but also more honest and informed decision-making, and also one part of the issues of building sustainability that are so key to climate change mitigation priorities.
5. Be realistic. Professor Bent Flyvbjerg has written extensively on the dangers and prevelance of optimism bias in infrastructure projects. His work includes highly academic research, and a popular book which is well worth a read: How Big Things Get Done: The Surprising Factors Behind Every Successful Project, from Home Renovations to Space Exploration. Optimism bias means that everyone overestimates how much they can do, and underestimates factors likely to impact delivery, from costs to scope. It also extends to thinking your project is 'different' or 'unique' and will therefore not suffer the same ignominious fate so many public sector build projects have suffered. As with all biases, when planning infrasturcutre work, check them at the door. Your project isn't special.
6. Have a plan, but don’t stick to it. When I arrived at my current job in the Falkland Islands, over two years ago, one of the first tasks I set myself was to update the National Infrastructure Plan. This task remains guilt-inducingly uncompleted. Largely this is because of the classic reason: the difference between urgent and important. Replacing and upgrading critical infrastructure is far more urgent than working on a hypothetical plan to do the same at some point in the future. But without a plan (which I do have, just an out-of-date one), all infrastructure work is carried out at huge risk. To speak terrible bureaucrat-ese for a second, public infrastructure is there to do one thing only: to fulfil and deliver policy ambitions. The powers that be want clean, green energy? There’s infrastructure for that. People want accessible, happy schools? You’re going to want a side of infrastructure to go with your teacher training, review of pay and conditions, and curriculum development. A strategic plan provides that policy context and guards against the risk of putting your spoil heap right where you want to dig next, to use an example from my days as an archaeologist. A plan is a way of future-proofing and sense-checking decisions. Yet no plan survives first contact with the enemy. There must be a flexibility to infrastructure planning that allows it to blend in more with the operational priorities of the day, despite its usual longer timescales. This, in my experience, is the hardest balance to strike, but the one most worth working towards.

I would argue strongly that capital infrastructure and operational management need to be much better blended within the public sector. Investing in infrastructure is a route to growth, perhaps in more ways than some people would imagine. But it is also a route to aligning parts of the public and private sectors in delivering the same aims. It is a way of giving people the basic tools to live their lives. And, done well, it is a way of countering and mitigating the effects of climate change, whether that is by incentivising use of mass transit systems or encouraging use of renewable energy and materials. Divorcing capital projects from their operational outcomes is not only risky in terms of successful delivery, it also means that the links between society and its physical environment are lost. And that is a loss to everyone.