Costs of Road Schemes
Deliberate underestimating of costs and Optimism Bias
Increased costs during the construction phase
Highways Agency roadbuilding budget doubles to cover up rising costs
What else could be done with the roadbuilding budet?
The costs of road schemes have traditionally always gone up whilst a scheme goes through the planning processes, but currently roads are experiencing higher than normal cost escalation. Costs have always gone up as road planners have traditionally exaggerated the benefits of the their schemes and underestimated the costs in order to gain approval. Once a scheme is approved, the real costs emerge as the scheme is taken through the planning processes, but by this time the scheme has developed momentum and much time and money has been invested in it and it becomes harder to drop. The Treasury introduced 'optimism bias' to deal with this phenomenon in 2003 but still the costs are rising (see "Optimism Bias" below)
Road Block has been tracking the costs of schemes for a year and a half through a series of Parliamentary Questions.
LATEST COSTS OF THE ROADS PROGRAMME
There are a number of funding streams for new roads.
The main one is the Targeted
Programme of Improvements (TPI) which is the Highways Agency's trunk road
programme, which currently totals £10.232 billion.
Other government funding streams for roads are via the Local
Transport Plan (LTP), currently totalling £1.703 billion, and the
Community
Infrastructure Fund (CIF) which totals £81.96 million.
This brings the total of government approved schemes to £12,016,989,000 (£12 billion).
The latest tables showing the all latest approved costs are here.
The latest cost of a mile of new motorway is £29.9 million.
Source: Hansard, Column 37W, 30 Oct 2006: http://www.publications.parliament.uk/pa/cm200506/cmhansrd/cm061030/text/61030w0007.htm#06103073000170
Adding an extra lane to a motorway costs approximately £10 million per mile, a mile of dual carriageway costs £16.2 million and a single carriageway is £10.6 million per mile.
Currently the single biggest contract in the roads programme is the M1 widening between junctions 21-30. This costs a staggering £1.9 billion for just 50 miles. This works out at £38 million a mile.
Put all together the M1 widening contracts total £3.74 billion.
The M25 widening contract costs 'only' £1.6 billion, however it is being offered to the private sector as a Design, Build, Finance and Operate (DBFO) or PFI contract. The lucky contractor will pay for the road construction up front, but then will be paid over £5 billion over a 30 year period out of tax payers money - Britain's biggest mortgage and a profit of £3.4 billion for the private sector.
The government in the Spring of 2007 will decide whether or not to approve
the M6 widening from Birmingham to Manchester. This is currently costed at
£2.9 billion for 51 miles of one extra lane each way.
The government have just fully approved the A3 Hindhead scheme despite a massive
cost increase. The scheme was first approved at £107 million, later
costs increased to £239 and in 2006 the scheme was finally approved
at £371 million.
Other big projects include the A14 Ellington to Fen Ditton scheme at £490 million, and the A120 Braintree to Mark's Tey at £320 million (yet to be approved into the programme).
Large local authority schemes include the Weymouth Relief Road at £77 million, the A4146 Stoke Hammond and Linslade Western Bypass at £53 million, and the £52 million Hastings Bypass. Currently the government are deciding whether or not to approve the £108 million Heysham to M6 Link in Lancaster.
The Parliamentary Written Answers supplying this data were on 24 May 2006, Hansard Column 1902W:
http://www.publications.parliament.uk/pa/cm200506/cmhansrd/cm060524/text/60524w0554.htm#06052547000274
24 July 2006, Hansard Column 746W:
http://www.publications.parliament.uk/pa/cm200506/cmhansrd/cm060724/text/60724w1873.htm#column_746W
6 Nov 2006, Hansard Column 685W:
COST INCREASES SINCE FIRST APPROVAL
Road Block has taken the cost of these projects when they were first approved, and the latest costs whilst the schemes are going through the planning process, and worked out how much they have increased in this time. Almost all road costs have gone up significantly.
Currently schemes in the TPI trunk roads programme, approved before April 2003 when the 'optimism bias' guidance was introduced, are averaging 68 per cent cost increases. Local authority schemes approved by the DfT are averaging 48 per cent cost increases.
The reasons for cost increases are numerous. The Highways Agency and local authorities will claim that it is 'external' factors such as high energy prices that are driving up costs, whilst Road Block says that it is more complex than that.
External factors - such as high energy, oil, materials and labour costs - are driving up the costs. All indications are that these are set to rise very steeply too. As China and India's economies expand rapidly there will continue to be a massive demand for materials. In Sept 2006, the Building Cost Information Service (BCIS) reported that construction inflation is set to rise by a predicted 33% over next five years, whilst predicting that background inflation will run at 12% in same period See article in Contract Journal on 6 Sept.
DELIBERATE UNDERESTIMATING OF COSTS AND OPTIMISM BIAS
Although high energy and materials costs are no doubt driving up costs of road schemes, this cost escalation problem is not new. Cost escalation of road schemes has been going on for decades. Is a well known phenomenon that in order to gain approval for projects promoters of schemes will deliberately exaggerate the benefits of their scheme, and underestimate the costs. Once approved the real costs will emerge as the scheme goes through the planning processes, and will usually increase again during the construction phase (see below). By the time the scheme is approved however the political momentum builds up behind a scheme that it is unlikely to be cancelled.
This tendency was covered by HM Treasury in its 2003 Green Book (http://greenbook.treasury.gov.uk/) guidance on project appraisal. They noted:
"There is a demonstrated, systematic, tendency for project appraisers
to be overly optimistic. This is a worldwide phenomenon that affects both
the private and public sectors. Many project parameters are affected by optimism
– appraisers tend to overstate benefits, and understate timings and costs,
both capital and operational."
Chapter 5, paragraph 61
The Treasury brought in this new guidance in 2003 to deal with this phenomenon,
which required the DfT to demand that the Highways Agency and local authorities
when promoting road schemes should 'build in' these additional costs.
The best research on optimism bias is by Professor Bent Flyvbjerg who published
Underestimating
Costs in Public Works Projects, Error or Lie, in the APA Journal in 2002.
Professor Flyvbjerg reported in Local Transport Today magazine (Iissue 438,
9 March 2006) that scheme promoters are routinely getting forecasts wrong,
and suggested there should be sanctions, including criminal proceedings, against
planners who deliberately mislead to gain approval for a scheme.
Since April 2003, the costs of schemes submitted for TPI entry approval have been estimated using the Treasury's Green Book guidance, that is they make allowance for inflation up to scheme completion, for non-recoverable VAT and for 'optimism bias' in line with the Green Book guidance.
This guidance also applies to local authority schemes which come to the government for funding and approval.
However several schemes approved since the introduction of the optimism bias guidance have since also gone up significantly in cost, illustrating that the guidance is not working. Road Block suspects that scheme promoters have simply adapted to the use of optimism bias and have just adjusted the costs accordingly.
Two recent examples show the failure of optimism bias to encourage realistic scheme cost estimating. The High Low Newton Bypass in the Lake District National Park was finally approved in April 2006 at £35 million. The scheme had been previously approved in Oct 2003 at £22 million, after the introduction of optimism bias. So in less than three years the costs had risen 59 per cent.
The Weymouth Relief Road in Dorset was approved in December 2003 at £54 million, post introduction of optimism bias. In November 2005, less than two years after approval, the costs were estimated to be £77 million - a 42 per cent increase. Dorset County Council have attempted to put this huge failure in accurate forecasting down to 'inflation' at 42 per cent! Road Block believes that the council deliberately lied about the scheme costs to get a very controversial and dubious scheme approved and the DfT failed to spot this when it approved it.
Before any scheme is approved the Department for Transport's own Economics and Appraisal department are supposed to check the Business Cases for the schemes. It is clear that the appraisal is not being checked closely enough by the DfT.
INCREASED COSTS DURING CONSTRUCTION PHASE
Freedom of Information requests to the Highways Agency about schemes built in the last ten years have revealed that the increase between a scheme's tender price (how much a contractor will bid for a scheme) and the final out turn cost (how much it eventually costs the taxpayer) is on average 29.34 per cent. The tables from the FOI request can be viewed here: http://www.highways.gov.uk/aboutus/documents/crs_478176_6march_spreadsheet.pdf
So schemes are approved at one cost, then go up again as the scheme is going through the planning processes, then again at full approval and when the tenders come back, and then the scheme costs go up yet again when the final bill comes in after construction.
HIGHWAYS AGENCY ROADBUILDING BUDGET ALMOST DOUBLES TO COVER UP RISING COSTS
Since 2002 the Highways Agency's annual roadbuilding budget has been between £500 million and £700 million. However, in the 2006-7 Business Plan for the Highways Agency, the budget leapt up to £1,046 million, the first time it had passed £1 billion, and a 78 per cent increase from £589 million in the previous year. The money to pay for this roadbuilding was stolen from the other Highways Agency budgets which all decreased, such as the Managing Traffic and Smaller Schemes budgets. You can compare the budgets here and the Highways Agency's 2006-7 Business Plan can be viewed here: http://www.highways.gov.uk/aboutus/9938.aspx
The Highways Agency are not building any more roads with this increased budget - it's the same old roads programme, just a lot more expensive.
The Highways Agency have also recently decided to turn the £1.9 billion M1 junction 21-30 contract from a PFI contract, financed by the private sector, into a state funded scheme. Somehow they have now got to come up with £1.9 billion to add just one lane to some sections of the M1.
WHAT ELSE COULD YOU DO WITH THE ROADBUILDING BUDGET?
"We also recognise that we cannot simply build our way out of the problems we face. It would be environmentally irresponsible – and would not work. So we must make our existing transport networks work more efficiently and in a more environmentally friendly way" - Prime Minister Rt. Hon. Tony Blair, Foreword to The Future of Transport White Paper (2004).
In order to ease congestion, there are many things we could do rather than endlessly try and build our way out of it. We all know that public transport needs more investment so that we can see our railways grow and become more reliable. We need better, cleaner and more reliable buses and trams in city centres. However, the biggest gains can be made from really simple low cost measures which can encourage people to change their travel choices.
Innovative work by Sustrans at the Sustainable Travel Demonstration Towns of Peterborough and Worcester has proved that it if households choose greener and healthier alternatives just once or twice a week car traffic can be significantly reduced by up to 13%. How is this achieved? Sustrans have used what is called "Smarter Choices" and Individualised Travel Marketing (ITM). The work involves making direct contact with households by phone and on the doorstep to offer personalised information and advice on alternatives to using the car, from bespoke bus timetables, to discounts on cycles. When given choices and information many people opt not to take the car.
Other work by Sustrans includes the Bike It! project which has seen cycling quadruple in 40 different schools around the country.
Making Smarter Choices Work, by Professor Phil Goodwin, Lyn Sloman and others, published by the Department for Transport, 2004.
Valuing
the Small: Counting the Benefits, research report by Professor Phil Goodwin
of Transport Policy, University College London, published October 2004.
Less
Traffic where People Live: How local transport schemes can help cut traffic,
by Lyn Sloman of Transport for Quality of Life, published July 2003,
For more information on alternatives to roadbuilding see the Road Block website.
