How much does "privatised planning" contribute to high costs?

[eldomtom2]

Alon Levy of the Transit Costs Project recently posted a blog post where they primarily argued against the idea that centralisation is the cause of high construction costs in the UK. Instead they argue that according to a forthcoming report by the Transit Costs Project, the primary cause is the privatisation of planning to consultancy firms and the use of special purpose delivery vehicles meaning any institutional knowledge gained is lost when a project is completed. Here is the relevant section quoted:

British Construction Costs and Centralization

There’s an ongoing conversation in the United Kingdom right about state capacity and centralization. The United Kingdom is notable for how centralized it is compared with peer first-world dem…

pedestrianobservations.com

At the Transit Costs Project, we are putting together a cost report on London, largely about Crossrail but also other recent urban rail expansion including the Docklands Light Railway and the Northern line extension. And what comes out of this history is that it’s not really about centralization. Rather, the United Kingdom invented what I called in the Stockholm report the globalized system, in which planning functions are privatized to large consultant firms while the role of the state is reduced to at most light oversight.

The explosion in costs in the 1990s, producing the Jubilee line extension at nearly four times the real per-km cost of the original Jubilee line, was part of this transition. It was easy to miss the first time we looked because the telltale signs of the globalized system, like design-build contracts, weren’t there yet. If anything, DLR was more privatized in its project delivery, and had reasonable costs until the Bank extension. And yet, delving more deeply, we found that beneath the surface it did have quite a lot of those negative features.

For example, while the Jubilee line extension was designed with in-house planning, it was understood that future projects would transition to more privatized planning. Thus, there was no expectation that the knowledge gained while building the extension would stick around, and at any rate, there was pressure to build like in Hong Kong, where pro-privatization British consultants cut their teeth in the 1980s and early 1990s. In effect, while the extension was designed in-house, it had all the features of a special purpose delivery vehicle (SPDV, or SPV), the preferred British and increasingly pan-Anglosphere way of delivering large projects: each project’s team is specific to the project itself and after completion the employees, drawn from a mix of private consultancies and public agencies, scatter and are not reassembled as a team for future projects. DLR was if anything the opposite: it was nominally private in its delivery but the same designers were involved throughout, moving between private employers and functions, so it was not de facto an SPDV, whereas the Jubilee line extension de facto was one.

What are your thoughts on this explanation for high construction costs?

 

[Pigeon]

I think the consultancy outfits are a symptom rather than a cause; rather the cause is more down to governments not wanting to commit to spending any money actually doing anything, but also not wanting to look like they're not doing anything, so instead they pay a lesser amount of money to some bunch of parasitic waffle merchants to spend a year or two pulling figures out of their backsides and then produce a glossy report that says it's not worth it.

As time goes on that has become elaborated to a hierarchical system where the first-level glossy report doesn't conclude anything but just comes up with four or five variations on the project, so then there is another round of waffle generation to produce second-level reports to say the variations aren't worth it. Or perhaps to come up with variations on the variations which then lead to a third stage, and so it goes on, etc. Even when they do appear to decide something it is merely the trigger for a further round of blithering over how to cheap out by cutting corners on it and leaving important bits out.

Of course this all takes so long that the project will in any case now cost several times what it was originally estimated to cost, so they have to go back to the beginning and start all over again producing more waffle based on the higher cost.

Moreover, all this endlessly recursive waffle generation itself gets to be so expensive that governments now don't even want to commit to that, so we also get a preliminary "stage 0" which involves spending money to produce a glossy report agonising over whether to spend money on having more reports.

Look at EWR. I remember hoping that proposals to reinstate services between Oxford and Bletchley were going to succeed back when it was simply a matter of allocating some existing trains and running them over the existing track. Instead we get round after round of made-up figures on such expensive paper that each round costs as much just to talk about it as the previous round had taken as being the cost of the whole project, but for all this expense there still aren't any trains running.

One is free to wonder whether this is simply down to political timidity and talk-but-do-nothing being the safer choice, or collusion between politicians and consultancy agencies to maintain the money flow for their jolly good chums.

 

[GRALISTAIR]

Cynical post of the year @Pigeon . But when centralised in BR days, costs were massively lower.

 

[Bald Rick]

Frankly it’s nonsense. Construction costs have gone up significantly for all types of construction.

In other news, BR was very careful with its accounting of construction costs, shall we say.

 

[eldomtom2]

Frankly it’s nonsense. Construction costs have gone up significantly for all types of construction.

In other news, BR was very careful with its accounting of construction costs, shall we say.

When you say "construction costs have gone up significantly for all types of construction", is that comparing costs internationally or is it just comparing costs in different fields in the UK?
I should also note that they are mainly not discussing BR and are mainly focussed on the Tube/DLR/Crossrail.

 

[Bald Rick]

When you say "construction costs have gone up significantly for all types of construction", is that comparing costs internationally or is it just comparing costs in different fields in the UK?

Yes!

 

[Magdalia]

When you say "construction costs have gone up significantly for all types of construction"

One of the major causes of high inflation in recent years has been the cost of energy. Many construction industry raw materials are energy intensive to produce, for example concrete.

The other major cause of high inflation in recent years has been the price of labour in the UK, due to a tight labour market, above inflation increases in the minimum wage and the increase in employers' National Insurance. The construction industry is still relatively labour intensive, construction still needs people doing stuff.

 

[Bald Rick]

The other major cause of high inflation in recent years has been the price of labour in the UK, due to a tight labour market, above inflation increases in the minimum wage and the increase in employers' National Insurance. The construction industry is still relatively labour intensive, construction still needs people doing stuff.

Also the quantity of labour.

Have a look outside any major construction site in London, and see how many people in HV orange are there, directing works traffic, holding back pedestrians, sweeping the streets, banking HGVs, etc etc. Very different to 25-30 years ago.

 

[RT4038]

Also the quantity of labour.

Have a look outside any major construction site in London, and see how many people in HV orange are there, directing works traffic, holding back pedestrians, sweeping the streets, banking HGVs, etc etc. Very different to 25-30 years ago.

not forgetting driving the water sprayer, sitting in a van all day watching the temporary traffic signals in case they go wrong etc

 

[eldomtom2]

One of the major causes of high inflation in recent years has been the cost of energy. Many construction industry raw materials are energy intensive to produce, for example concrete.

The other major cause of high inflation in recent years has been the price of labour in the UK, due to a tight labour market, above inflation increases in the minimum wage and the increase in employers' National Insurance. The construction industry is still relatively labour intensive, construction still needs people doing stuff.

Does this explain the UK seeing construction costs become much more expensive than other European countries from the late 90s onwards, though? Does the UK see higher costs of materials and higher labour costs than other European countries?

 

[whoosh]

And after all that there's the inquiry as to why it cost so much and was mismanaged. £13 million for the inquiry in the case of Edinburgh's trams.

 

[eldomtom2]

Frankly it’s nonsense. Construction costs have gone up significantly for all types of construction.

In other news, BR was very careful with its accounting of construction costs, shall we say.

I put your post to the person writing the study referenced my first post and got this in response:

British Construction Costs and Centralization

There’s an ongoing conversation in the United Kingdom right about state capacity and centralization. The United Kingdom is notable for how centralized it is compared with peer first-world dem…

pedestrianobservations.com

I mean yes nominally costs have gone up. But the UK’s cost performance is just so much worse than other 1st world industrial countries. And actually in the last decade we’ve generally been investing more in rail than all other OECD countries sans Japan and have received rather little.

And I’ve encountered a lot of UK rail people who want to just say its because “its an accounting gimmick”, “Madrid is lying” or “the French don’t include rolling stock costs we do”. Its an excuse so the sector can avoid doing anything other than MOAR MONEY.

And 1980’s BR especially Network Southeast did more electrification than any other period of UK rail history, while subsidy to the sector declined, that speaks to cost efficiency not accounting gimmicks.

And late BR was also making a lot of progress on operations efficiency, getting quite a few driver only operations services in the London commuter belt. You can make a point of cut corners leading to Clapham Junction and Hatfield disasters though.

 

[Bald Rick]

I put your post to the person writing the study referenced my first post and got this in response:

British Construction Costs and Centralization

There’s an ongoing conversation in the United Kingdom right about state capacity and centralization. The United Kingdom is notable for how centralized it is compared with peer first-world dem…

pedestrianobservations.com

I mean yes nominally costs have gone up.

Good I’m glad that’s agreed.
…

And I’ve encountered a lot of UK rail people who want to just say its because “its an accounting gimmick”, “Madrid is lying” or “the French don’t include rolling stock costs we do”. Its an excuse so the sector can avoid doing anything other than MOAR MONEY.

It’s not an excuse.


has the author got hold of final accounts for work in the BR era and current times to compare?

How about a comaprison with, say, French railway construction, where consultants are used extensively (including UK consultants ), and Special Purpose vehicles created for finacing and delivery ?

 

[HSTEd]

I think these sorts of special purpose vehicles further entrench what I call "contractual paralysis" in the railway industry (it also appears in other parts of the quasi private sector like power systems and water).

Everything is done according to the contract, which have been written to be very detailed in what is to be done.

It becomes very difficult to get all parties to agree to an alteration of the contract, even as circumstances change. There is no central authority with the power to force agreement on alterations to the contract and all the incentives end up misaligned.

So decisions are made that then become locked in for decades, even though noone at the time really thought that should happen.

 

[YorkshireBear]

I believe it's a bit of both. Costs have gone up, some of those costs are justifiable and linked to energy and labour, some are linked to Network Rail outsourcing assurance of some activities to the supply chain undertaking those activities.....

And agree with HSTEd above, in the last few years things have become much more following contracts to specific letters with less flexibility to keep things moving and on target for benefit of all parties. Breakdown in trust maybe I don't know.

Based on my day in, day out experiences in the sector.

 

[deltic]

Having worked in consultancy on major projects I would agree that a lot of costs and delays are due to consultants having no incentive to deliver a minimum viable product in the shortest time frame. Many contracts are on a time and materials basis on low margins so money is made by having lots of people working on them for long periods of time. Its not helped by client organisations being hollowed out and therefore unable to challenge consultants or wanting every possible option to be looked at rather than knowing that most of them are not worth considering. Its notable that in my experience TfL are a much better informed client than DfT because they have much greater in house expertise and know their patch. Most of Whitehall gets lost once it strays outside greater London.

 

[stuu]

How about a comaprison with, say, French railway construction, where consultants are used extensively (including UK consultants ), and Special Purpose vehicles created for finacing and delivery ?

The Grand Paris Express project is building 200km of metro for €40bn (€200m/km). The 7.5km Bakerloo line extension is currently estimated to cost the best part of £1bn per km. Clearly there are some economies of scale savings and accounting differences but do they really explain why Paris can do it 5x cheaper than London?

 

[eldomtom2]

Good I’m glad that’s agreed.
…



It’s not an excuse.


has the author got hold of final accounts for work in the BR era and current times to compare?

How about a comaprison with, say, French railway construction, where consultants are used extensively (including UK consultants ), and Special Purpose vehicles created for finacing and delivery ?

I have received a response to your post, which is quite long and spanned multiple comments:

British Construction Costs and Centralization

There’s an ongoing conversation in the United Kingdom right about state capacity and centralization. The United Kingdom is notable for how centralized it is compared with peer first-world dem…

pedestrianobservations.com

Yeah France uses consultants, a then copied SPV for GPE and guess what costs exploded. And now GPE SPV is being turned into a permanent agency.

Again you and your source are confusing consultants and consultants, hiring design agencies to do last the last 70-90% of design is fine, especially if you have itemised cost lists, clear regulations and existing pre-fab menus to build trains out of. That’s how southern Europeans do it. But modern UK consultant dependency is having them do all the stuff that is the client/government’s responsibility. Private companies cannot wield political legitimacy to make political choices on design, permissions etc, which is why their only response to spend public money (which they are okay because they get a cut). Hence HS2 or East-West-Rail.

Yeah, sorry but overall rail spending in the last decade of the 1980’s wasn’t rising enough to explain the large increase in infrastructure projects at least NSE and Scotrail zones. Doing 2-3x the electrification over a decade compared to GWML era is kind of a tell.

Read Lines of Powers by John Buxton and Donald Heath (the latter was chief of ECML). You can also read the RIA electrification challenge. Unless you think all of them were liars and idiots.

[...]

HS2 is so bad that it has at least a dozen primary issues. What I can say is the 4 SPV projects HS2, East-West Rail, Crossrail and HS1 all have had worse relative cost-performance compared to Network Rail or TfL let alone international cases. The two latest HS2 and East-West Rail are dramatically worse than the earlier two. And HS1 has had disappointing benefits because of ops choices and fixable design choices (i.e. needs 2-3 more stations to provide good super commuter service).

We also from the various tram projects semi-SPV, big DB contracts with similar problems.

One thing that came up in my report, is that the UK has had Permanent Revolution in institutional design since 1987. I.e. “its broken, break it again”.

On the plus side, we are moving back to more conventional “owned by the state, run by the state” model and we’ve been moving there since railtrack collapsed. The problem is high costs are entrenched and most of the industry sees our high costs as “cost of doing business”.

[...]

Oh no, I would kill for GPE costs in London. Still lower according to PPP than the Jubilee Line extension. But according to our database GPE and other recent projects are clearly elevated costs. And yeah, station bloat seems to be a big part.
I mean this isn’t Canada since mid-2000’s explosion under UK influence. But a 20-50% increase in costs is still a big deal and not good.

SPVs will find it extremely difficult to avoid station bloat. Because they generally built in rejection of previous system (with its compromises in design) and lack traditional state organs legitimacy to say no on cost grounds. So they spend to solve obstacles.

 

[Brubulus]

A lot of it is risk avoidance - look at the explosion in somewhat unnecessary and easily automated labour in the construction sector is caused by risk avoidance/reduction which is unnecessary.
I'm not just talking about safety risk, I'm talking about contractural and cost risk, where the risk of a cost increase can be worse than a higher cost, or contracts are structured to effectively hide the actual costs (HS2).

SPVs reduce political risk, and therefore are preferred.

 

[Technologist]

Having worked in consultancy on major projects I would agree that a lot of costs and delays are due to consultants having no incentive to deliver a minimum viable product in the shortest time frame. Many contracts are on a time and materials basis on low margins so money is made by having lots of people working on them for long periods of time. Its not helped by client organisations being hollowed out and therefore unable to challenge consultants or wanting every possible option to be looked at rather than knowing that most of them are not worth considering. Its notable that in my experience TfL are a much better informed client than DfT because they have much greater in house expertise and know their patch. Most of Whitehall gets lost once it strays outside greater London.

Rail should be forbidden from using the "minimum viable product" terminology, clearly someone read the "lean startup" about 10 years ago and liked the terminology but then completely misapplied it. You do an MVP to test your idea, then on the basis of that you will either scale up or pivot to something else.

In most cases an rail MVP appears to be driven by either construction phasing due to working on a live system or it appears to be based on funding timescales.

Either way the best approximation for the way most things are run is "cargo cultism", cargo cults originated on the pacific islands following WWII where islanders seeing the Japanese and later Allied forces arrive with their technological wonders started building mock airports and dressed up as pilots and ground crew in the belief that this is what would cause aeroplanes and ships full of modern goods to appear. Management and consultants essentially copy things that they have heard are associated with successful sectors and companies without really understanding why those things worked and the context in which they worked.

For the last 20-30 years outsourcing has been the mantra in industry, then about 10-15 years ago people like SpaceX turned up and started being vertically integrated and radically reducing costs. So now the cargo cult is slowly moving back in the direction of insourcing. This is despite the fact that what really made SpaceX in source things was that they moved at a velocity where having to wait for procurement to source suppliers and then for them to deliver was much longer than just getting someone in house to just do it, they also miss the point that SpaceX's procurement processes are also likely 10x quicker than most places that outsource everything too! The speed, clarity of purpose, ownership and accountability of staff was the advantage (this is always true) not whether something was in sourced or out sourced.

Outsourcing works fine in lots of cases when you do get economies of scale, specialisation, better utilisation and career paths for workers, however you the get to the point where it becomes a mantra or unthinking strategy and you end up with people claiming these advantages when the supplier is going to have to build a capability for the customer, from scratch and this capability is going to serve only that customer in which case you might as well have done it yourself and if you need help just hire some of the people who would have organised it for you from said supplier.

It's pretty obvious that if you are the only body who is allowed to build and operate railways you should probably employ most of the people who know how to do that yourself!

To do a bit of cargo cultism SpaceX soon learnt to avoid any specialist space industry suppliers as it was a certain opportunity to be fleeced an a very high margin part or service. If a supplier is a "rail" supplier (by rail supplier I mean a business where they don't use people interchangeably between sectors) and isn't in an area where it makes sense for them to have pan national scale they should probably be either bought or replicated in house.

 

[Bald Rick]

I have received a response to your post, which is quite long and spanned multiple comments:

Very good. I don’t inderstand much of it, but I’m sure there’s reasoning behind it.

 

[eldomtom2]

Very good. I don’t inderstand much of it, but I’m sure there’s reasoning behind it.

I think it is relatively easy to understand. Firstly, they argue that France's adoption of SPVs has led to increased costs. They then argue that using consultants is not inherently negative, the problem is using them too early in the process; using them for the "last 70-90% of design" is fine, especially if they're kept on a fairly tight leash.
They then argue that NSE and Scotrail's infrastructure projects increased in the 1980s to a degree that cannot be explained by increased rail funding. They cite Lines of Powers by John Buxton and Donald Heath and the RIA Electrification Cost Challenge Report as backing up their claims on electrification.
In the second comment, they argue that while HS2 has many issues, the use of an SPV is clearly a major factor in causing high costs. They state that the four SPV rail projects, HS2, East-West Rail, Crossrail and HS1, have all had worse relative cost performance when compared to Network Rail and TfL, with HS2 and EWR being particularly bad.
They argue that the UK has suffered from a “its broken, break it again” mentality when it comes to design since 1987. They believe increased state control with things like GBR may be beneficial, but fear that high costs are too entrenched and that too much of the industry sees them as impossible to change.
In their third comment, they argue that while recent French projects involving SPVs have seen increased costs, they are still cheaper than the UK. They argue that much of the cost increase comes from station bloat, positing that the SPV system lacks the ability to say no on cost grounds and instead spends to avoid objections.

 

[WAO]

I think that the fundamental problem is the lowered status of service delivery professionals (such as engineers and operators) against those in law, money and administration. This was more noticeable from the 1990's onwards in most spheres. The ignorance of decision makers about the issues over which they presided led to a more prescriptive, codified, risk averse policy in design and contracting (and regulating). Teamwork and trusted contractor attitudes were lost and conflict and greed rather than collaboration became the rule. This has raised costs in both investment and operation, where unnecessary customer/contractor interfaces double overheads, raising costs and time frames.

I think our Engineers and Operators, whether in the public or private sector are as good as any in the world, especially if they have the freedom to act professionally.

The answer goes back to quality management: point enablement (and competence) and point accountability.

WAO (CEng)

 

[Grimsby town]

To answer the title, probably not that much. I getting the feeling sometimes that a lot of people believe a large part of infrastructure is paid to consultancies but its a tiny cost in reality. New stations generally cost £20 million+ but most of that is going to be construction costs and nothing to do with the planning side. I'd estimate that consultancy costs are generally less than £500k for a new station.

Personally, I think there's too many people working in consultancy industry now and that does cause cost increases. There's a lot of legal back and forth, contractual arrangements and wasted time trying to understand requirements. But when consultancy costs are likely a couple percent of thr overall costs of infrastructure projects, there'd need to be a hell of a lot of waste for it to have a significant impact on overall cost. There certainly isn't that much wastage.

Not necessarily rail, but I've noticed in local transport a movement towards larger transport authorities like TfGM and Transport for Wales hiring more staff and at quite a good wage, even compared to private consultants, so it'll be interesting to see how that impacts costs. For all the criticism that consultants get, they're generally working longer hours than public sector organisations and there's more pressure to produce results.

 

[HSTEd]

To answer the title, probably not that much. I getting the feeling sometimes that a lot of people believe a large part of infrastructure is paid to consultancies but its a tiny cost in reality. New stations generally cost £20 million+ but most of that is going to be construction costs and nothing to do with the planning side. I'd estimate that consultancy costs are generally less than £500k for a new station.

Personally, I think there's too many people working in consultancy industry now and that does cause cost increases. There's a lot of legal back and forth, contractual arrangements and wasted time trying to understand requirements. But when consultancy costs are likely a couple percent of thr overall costs of infrastructure projects, there'd need to be a hell of a lot of waste for it to have a significant impact on overall cost. There certainly isn't that much wastage.

Not necessarily rail, but I've noticed in local transport a movement towards larger transport authorities like TfGM and Transport for Wales hiring more staff and at quite a good wage, even compared to private consultants, so it'll be interesting to see how that impacts costs. For all the criticism that consultants get, they're generally working longer hours than public sector organisations and there's more pressure to produce results.

In my own sector, the nuclear industry, there have been examples where consultant choices appear to have impacts far beyond the notional cost of the consultant work.

Consultant designers being paid on a cost plus basis is believed by many in the industry to be a primary driver of the failure of the Sellafield MOX plant. The plant ended up overdesigned to the point of being almost unbuildable, and then unoperable once it was (eventually) complete.

It's not as simple as "consultants only had a direct cost of x% of the total" and saying that they can't be a major problem in cost growth in other areas.
The problem seems to be that it is very difficult to properly align consultants' incentives with the incentives driving the project.

 

[Grimsby town]

In my own sector, the nuclear industry, there have been examples where consultant choices appear to have impacts far beyond the notional cost of the consultant work.

Consultant designers being paid on a cost plus basis is believed by many in the industry to be a primary driver of the failure of the Sellafield MOX plant. The plant ended up overdesigned to the point of being almost unbuildable, and then unoperable once it was (eventually) complete.

It's not as simple as "consultants only had a direct cost of x% of the total" and saying that they can't be a major problem in cost growth in other areas.
The problem seems to be that it is very difficult to properly align consultants' incentives with the incentives driving the project.

That's why it's important to have public sector/client organisations that have sufficient time and knowledge to dedicate to a project. I've certainly experienced issues with public sector clients not having the knowledge or skills to provide guidance on a project. That inevitably leads to inefficiencies and confused outcomes.

I think the in transport terms, there's not that many issues with incentives. The industry is too competitive to do a bad job and get away with it. If you string a client along and constantly try to get more money, you're lose subsequent work. There might be issues on bigger projects like HS2 because the sheer scale means that pretty much every contractor has to be involved but I don't think its an issue on most projects.

 

[Bald Rick]

I think it is relatively easy to understand. Firstly, they argue that France's adoption of SPVs has led to increased costs. They then argue that using consultants is not inherently negative, the problem is using them too early in the process; using them for the "last 70-90% of design" is fine, especially if they're kept on a fairly tight leash.
They then argue that NSE and Scotrail's infrastructure projects increased in the 1980s to a degree that cannot be explained by increased rail funding. They cite Lines of Powers by John Buxton and Donald Heath and the RIA Electrification Cost Challenge Report as backing up their claims on electrification.
In the second comment, they argue that while HS2 has many issues, the use of an SPV is clearly a major factor in causing high costs. They state that the four SPV rail projects, HS2, East-West Rail, Crossrail and HS1, have all had worse relative cost performance when compared to Network Rail and TfL, with HS2 and EWR being particularly bad.
They argue that the UK has suffered from a “its broken, break it again” mentality when it comes to design since 1987. They believe increased state control with things like GBR may be beneficial, but fear that high costs are too entrenched and that too much of the industry sees them as impossible to change.
In their third comment, they argue that while recent French projects involving SPVs have seen increased costs, they are still cheaper than the UK. They argue that much of the cost increase comes from station bloat, positing that the SPV system lacks the ability to say no on cost grounds and instead spends to avoid objections.

They argue lots, without (from what I can see) providing any evidence other than “costs have gine uo, we think it’s this”

Have they actually worked on any UK rail major projects since the turn of the century?

In my last one (of the four I’ve been involved in) we used consultancies to do things we didn’t have in-house capability on, because it was rather specialist, and/or we needed a lot of it in a short space of time and it was much more practical to ‘buy’ rather than ‘make’.

I have never worked in consultancy, but know plenty who do / have done. Some consultancies are better than others, but as long as you commission and manage them competently, they are a crucial part of a development and delivery organisation.

In my view, having done it, the issue of costs is usually down to a client not really understanding what they want (and therefore changing tack, especially when faced with difficult choices), and/or inappropriate contractual mechanisms. Having consultants involved is almost immaterial.