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The Royal Society of Edinburgh Infrastructure Costs Too Much, And It Neednt Terry Hill CBE, Chairman, Arup Group Trusts
Wednesday 7 March 2012 Report by Jeremy Watson

The lecture began with Terry Hill spelling out his abiding philosophies. For civil engineers, he explained, the greatest gift they could wish for society is having the ability to change peoples lives. But ranking alongside that is bringing in projects on time and on budget, which is not the rarity sometimes supposed. What he wanted to talk about however was why it costs more to build infrastructure in the UK than it does in other comparable countries. Why is it as he had told government ministers the High Speed 2 (HS2) project in England would cost 55 per cent more in this country than it would have done in any other country in Western Europe? As a result, ministers in the last Labour government had set up Infrastructure UK and the work had carried on under the present Coalition administration, which gets it just as much. This had given rise to the National Infrastructure Plan (NIP) 2011, agreed by the industry and the Treasury, aimed at improving the planning of infrastructure in the UK. Its contents, said Hill, were stunning, containing as it did 250bn of projects over the next five year double the amount in the previous five years involving transport, energy, waste, water and telecommunications projects. The NIP says that what is needed in the UK is a revolution in transformational infrastructure investment of the kind that helped bring the 2012 Olympics to London by making sure that HS1 runs to the main venues in London. The NIP addresses several key themes, Hill said, that acknowledge problems in improving the UKs infrastructure. One is obsolescence. As the UK was one of the first countries to have an Industrial Revolution, the infrastructure built then and still in use is knackered and crying out for renewal. Yet because of todays global nature of infrastructure investment, the UK has to make sure that the right investment environment is available or face the prospect of that investment going elsewhere. Demand is also a key consideration but there is no doubt that, despite the recession, demand is holding up in this country. The demand for rail, for example, is at its highest since the end of WW2. Then there is inter-dependency of infrastructure projects, which has not always been fully thought through. One example of good practice in this area is a recent picture of an electricity sub-station surrounded by flood water, which is only being kept at bay by strongly-built dykes. Without those dykes, the power to the whole of the West Country could have been knocked out. It shows that Infrastructure projects has to mesh. Given the complexity of infrastructure systems, Hill asked, how is it possible to attract both public and private sector funds into investing in it? The big pension funds see it as a risky investment area but, Hill argued, actually, in the long term, it isnt. Even though there may be risks in the early years of a project which is what pension funds get nervous about there are ways of making it more palatable. The UK started building projects using the Private Finance Initiative (PFI) and, in general, this has worked well with many success stories. There are other financing models too, such as the Scottish Futures Trust. But how

2 should the UK continue to get private sector funding in to projects such as the new Forth Road Bridge or the 30bn High Speed 2 (HS2)? The financial figures revealed that spending on infrastructure in the UK dropped away at the turn of the 20th Century but if the plans to spend 250bn in the next five years are to be realised then the UK has to get private sector financing back, Hill insisted. The first step is to have a plan a vision worth investing in. Hill said he has spent much of his working life getting ministers interested in infrastructure but politicians often do not think beyond the electoral short term. They ask what is in it for them in sanctioning the spending of huge sums of money on projects that wont come to fruition while they are in office. To help overcome this, a firm grip of costs is necessary. Data from Europe shows that UK projects are around 15 per cent more expensive to build than in France, Spain or Germany, whether they are tunnels, roads, railways or wind farms. But why, Hill asked? Some reasons were obvious. Britain is a densely-crowded island with an ageing infrastructure which is sweated more, so replacement projects tend to be more expensive. There is also evidence that more money is put into upfront capital costs, as opposed to whole-of-life costs. But capital costs are higher in the UK than in most other Western European countries. The UK planning system is also too slow and too long; Heathrow Terminal Five was seven years in the planning process but is it seven years better for it, Hill asked? But there are also other factors at play in driving up costs. The industry could not properly plan ahead without a proper investment pipeline of projects. CrossRail in London was only fully funded three months before it started, which was hardly ideal, Hill said. Then there is poor governance, a lack of knowledge by clients of what they want to get out of a project, poor incentives to keep costs low, and poor information about the extent and condition of assets. There are also cases of costly over-specification, Hill argued. The Jubilee Line in London looks stunning but it cost twice as much as the Madrid Metro, so choices have to be made. Additionally, procurement procedures in the UK are overly conservative and riskaverse and there are supply chain difficulties. In Germany, for example, only one company is usually working on a project, which is very different to the UK where 80% of the work is contracted out. There is also the stop-start nature of investment in the UK, demonstrating a lack of public sector planning.The water industry, governed by Ofwat, works in five-year funding cycles leading to three-year investment years with two dead years for in between. The UK lost its rolling stock industry because there was a seven-year hiatus in which there was no orders. And many large projects are now managed on a set budget, rather than lowest cost. If the budget contains Contingencies, then this tends to be viewed as available budget. If a contractor knows that the budget is, for example, 100m, but there is 50m for contingencies, then the project will be built for 150m. That happens time and time again, Hill said. The stringent way in which environmental and safety regulations are applied in the UK is also partly to blame. It is fantastic, Hill said, that the UK has the safest industry in Europe but could the same outcomes be delivered more efficiently and at less cost? Hill said he believed they could and outlined five main areas for improvements. The first is to create that highly-visible project pipeline have a plan and stick to it which would reduce the costs of finance. That had been done through the NIP. Second is delivering good governance, which means, on any project, being clear who the clients are, where the money

3 is coming from and who is going to deliver it. At all levels, people with experience in delivering multi-billion-pound projects are needed. Thirdly, greater discipline is needed in the public sector in the commissioning of projects and programmes, particularly during a recession. There has to be a national data base of costs and a reduction of the overlapping standards, which drive costs up. An investigation has found that the UK rail network has seven sets of overlapping standards and the tendency, when there are two dealing with the same subject, is to choose the most expensive, just to be safe, which has the effect of unnecessarily driving up costs. When London Underground management investigated, it found it had 2,900 standards relating to infrastructure projects. They have now been reduced to 400 without compromising areas such as durability and safety. Another challenge is to ensure that projects are designed before they are built. Hill recalled a Permanent Secretary to the Treasury who responded with incredulity when he learned that construction sometimes started before the design was finalised. Yet the industry is now capable of building quickly. What is needed is a permanent system of design and plan long, followed by build fast. The fourth area of improvement identified by Hill is in developing smarter ways of using competition to lower costs. The commissioning of the new Olympic Stadium is a good example, he said, even though Arup had lost out. Arup realised fairly early in the process that the client wanted the team that built the Emirates Stadium for Arsenal FC without fuss, on time and on budget. The decision had been made by an intelligent and knowledgeable client, which chose the team that it knew could deliver the project. There is a tendency in the UK to commission the company that has simply put in the lowest cost bid, without looking at the bigger picture, and that is where things could go badly wrong. There is a lesson to be learned from French civil servants, who prefer to work with companies with whom they have a long-term relationship and who they know are competent to deliver. Government has a part to play here, Hill suggested, as one problem is the commercial capabilities of public sector procurement officials. The government is now looking at developing a cadre of top level people with this kind of experience who can move from one big project to the next. If costs are to be reduced the public sector has to be as good as it can be in commissioning projects, Hill said. Finally, he suggested, if the first four challenges could successfully be tackled then the fifth would fall into place. That would involve an industry that is more confident in the way forward and able to respond by investing in efficiency, training and innovation. Overall costs would be lowered again. So where does the industry stand at the moment? Many improvements are already being made. A construction pipeline has been published, an industry standards group has been established and project banks have been set up to overcome the problem of SMEs (Small and Medium Enterprises) not being paid. In addition, an Industry Charter has been created so the industry can work together, a public procurement toolkit has been developed and benchmarking data has been made available.

The mantra continues to be On time and on budget, but now the aim is to deliver even more infrastructure for the same money. You cant beat that, can you, Hill concluded.

4 Questions and Answers Q: How do you relate your grand vision to the Edinburgh trams project? A: I am part of the construction industry, so, in a way, I am just as culpable when things go wrong. When things go wrong, it is often because costs were not controlled. I dont know the details of the trams project but it may have been down to that, or lack of contingencies or problems with procurement, things like that. If you look you will probably find these things. Perhaps best to ask an Edinburgh taxi driver that question! Q: I have a real problem with On Time and On Budget because it depends on whether the budget is set initially at the right level. Sometimes, it is the delivery of the timetable that is the weak point. A: You are right. I think it is better that people target to go under budget and look at lowest cost. Its a hangover from the boom years. Then the best way to get on-time-on-budget was to have plenty of time and a big budget but we are not in those times any more so we have to ask what is the most important thing? When the Jubilee Line had to be finished before the big party at the Millennium Dome, there was 1.2bn of extra cost because time was of the essence. Sometimes, the timetable doesnt matter. So the simple On Time, On Budget mantra often isnt enough in complex projects. Q: The slides show that the UK is not as good as other European countries in keeping costs down. Why is there such a difference? A: Infrastructure is a complex area. I heard a story about a physics lecture and a student at the back who misheard the professor say that the Sun is going to die in 5bn years. The student asked: Sorry, did you say 5m or 5bn? The professor confirmed 5bn. Oh, thats all right then, the student said. So we are talking about big and complex projects. I know you would like me to present you with a killer app, but, although some people may disagree, I think it is the calibre of the people defining and commissioning projects. Thats not to say that the people doing it now are dumb. Its just that they do not do this very often in their lives. They dont define and commission such big projects very often. They dont take enough risks in how they procure and dont have enough faith in the organisations that are going to deliver it. Q: You touched on the organisation of contract providers and contrasted this country with what happens in Germany, where more is done in-house with much less outsourcing. Can you comment on that, because in many spheres it is regarded as a good thing to outsource to reduce costs? A: Outsourcing is a good thing. It is no good having a big in-house workforce if next year your turnover is going to be half that of the previous year. What is really needed is a stable relationship between construction industry managers and the chain of supply contractors. What we are trying to do is encourage long term relationships because if the industry is fragmented there is little innovation across boundaries or development of new techniques and the industry doesnt keep pace with other industries. Q: Politics was not mentioned in your lecture but what influence does it have on how the industry works? A: Politics is totally enmeshed with big infrastructure. It isnt like investing in a distribution centre or a hypermarket when projects are so large. Arup was involved in HS1 in terms of

5 lobbying and pressure groups. When we won that campaign all the detractors said: Oh, that was just a political decision. My answer was what are politicians supposed to do? They are there to take decisions about things that change lives. Arup was involved in building a bridge between Copenhagen and Malmo, a rundown city in Sweden, in what was a politically-contentious project. But Malmo has now been economically reborn. Infrastructure has the power to transform lives and thats political.

Vote of Thanks The vote of thanks was given by Gareth Pender, professor of environmental engineering at Heriot-Watt University, who described Terry Hill as a man at the top of his profession. Terry has identified the problem and prescribed actions to make a difference in future, the very essence of civil engineering. Terry is an excellent communicator who has clearly delivered a complex message peppered with useful facts such as the 250bn to be spent in the next five years. He also mentions that construction in the UK is more expensive than in benchmark European nations and that the industry has 250,000 companies, an average of seven staff each. That is staggering. The essence of Terrys talk is about how a pipeline of projects encouraged investment, how there is limited experience in this country in the governance, commissioning and delivery of projects and how we need to develop a more competitive industry. Part of that pipeline is the National Telford Institute, which sponsored this lecture, and which is an initiative in universities to work together on research into the supply and delivery of infrastructure. Professor Pender added that he was due to meet a group of young people considering taking university courses in the construction industry and it would be reassuring for them to hear the commitment outlined in the National Infrastructure Plan for 250bn of spending as they might be playing their part in delivering it.

Opinions expressed here do not necessarily represent the views of the RSE, nor of its Fellows The Royal Society of Edinburgh, Scotlands National Academy, is Scottish Charity No. SC000470