Governments and businesses across the globe face a growing challenge
That challenge is: controlling the capital costs and timescales of megaprojects, from infrastructure to transition to clean energy to high-tech factories and data centres to transport systems to boost development and cope with geopolitical risks. As big projects experience massive delays and cost overruns, taxpayers and private investors are becoming increasingly intolerant, calling for accountability and decisive action. In response to mounting pressure, projects are often halted—even when delays and cost growth are justified because of legal compliance, and long-term value could be achieved.
Two Schools of Thought: Governance Control vs. Stakeholder Inclusion
Over the past two decades, project management consultants and scholars have proposed two main solutions. The first solution advocates for stricter governance and managerial controls, including earlier supplier involvement to refine initial performance targets and mitigate the risks of future cost overruns and delays. This approach assumes that projects derail because of either managerial incompetence or dishonest projections. The second solution focuses on the growing complexity of planning, given that more and more non-user groups, including local communities, public agencies, social activists, environmentalists, and supplier workforces, demand a say in the process. This school of thought suggests that early engagement with all the project stakeholders is crucial to addressing their concerns and avoiding costly disputes later.
However, the combined emphasis on governance and stakeholder collaboration has driven project management costs to unprecedented levels. Today, indirect project costs account for nearly 20% of total costs. Ironically, despite these major investments in governance and collaboration, our ability to predict costs and timelines has not improved. Take the UK, which prides itself on project management. From the 2012 London Olympics to Crossrail and High-Speed 2, major projects have consistently overshot their budgets, undermining investor and tax-payers confidence and eroding trust.
A Misalignment Between Law and Economics: Why Costs Keep Rising
Our research, which takes a stakeholder-focused perspective, reveals that the core issue isn’t project management itself. The problem lies in a fundamental misalignment between legal frameworks governing planning consent and the economic criteria used by investors to assess if a project is worth the investment. The UK is a case in point. The Planning Act 2008 requires managers to engage with stakeholders and address their concerns. Planning regulation has evolved towards a ‘presumption in favour of sustainable development’. And supreme court judgements mandate managers to give ‘conscientious consideration’ to all stakeholder reasonable claims. This stakeholder-oriented approach has widened the scope of managers’ responsibilities, ensuring that social and environmental impacts are considered. But economic tools used to assess projects rarely account for the benefits of stakeholder engagement.
So, while laws and regulation mandate sustainable development and stakeholder inclusion, the economic models don’t recognise the value of these elements. As a result, managers are pressured by shareholders and investors to commit to budgets early on that ignore stakeholder concerns, leading to unrealistic cost and time estimates. When managers eventually address the stakeholder issues as the project unfolds, project costs rise and deadlines slip. Two-thirds of cost growth tends to occur before consent is even granted.
A Fork in the Road: Rethink Legal Frameworks or Tolerate Project Chaos?
It’s unreasonable to think that we can design a system where managers can find ways to satisfy their shareholders as well as all project stakeholders perfectly. Managers must make trade-offs about which criteria to prioritise that are supported by shareholders and stakeholders. Still, our research shows that projects seen as fair in their value distribution are more likely to gain stakeholder support and face fewer legal disputes. Justice in value distribution makes projects more predictable and reduces conflict. Additionally, when stakeholders are given a voice and some level of control, they are less likely to feel aggrieved by unfavourable decisions. But this raises a question: How can managers balance this stakeholder-oriented approach with “value for money” metrics that prioritise user willingness to pay and shareholder value maximisation?
As a society, we must confront the consequences of our legal frameworks. If the law requires stakeholder engagement, it’s essential to budget accordingly. For shareholders to expect unrealistic budget that corners managers into endless bargaining with stakeholders, is to ask for inefficiency. Uncertainty around the cost of negotiating collaborative agreements should be recognised, rather than ignored. We are at a fork on the road: either continue with the costly chaos or face the problem head-on. If projects become unaffordable, and yet they are essential for socio-economic progress, we need to rethink the laws and regulation themselves.
Making Stakeholder Engagement More Affordable: A Path Forward
This also raises the question of how to make stakeholder-oriented projects more affordable.
First, we need to trust people more. The risks of not trusting are greater than the risks of trusting. By fostering trust, we can eliminate project inefficiencies created by excessive scrutiny and unrealistic budgets. It’s also impractical to pass risks to contractors that their balance sheets can’t handle, given their already slim profit margins.
Second, if we believe consultation with stakeholders is valuable. we must recognise the worth of addressing their concerns. Since user fees rarely cover capital costs of stakeholder-oriented projects, public sponsorship supported by taxpayers will be necessary. Taxpayers should be educated about the value of stakeholder inclusion, and compensation for those affected by projects must be just. This fairness will lead to more efficient outcomes.
Third, we should extend the time over which capital investments are written off. When capital assets have a lifespan of 150 years or more with maintenance, it doesn’t make sense to write off their cost in 60 years. Longer depreciation periods would spread the costs of the investment more evenly over the project’s true lifespan.
Finally, we need to find ways to attract private capital to fund large projects. Large pools of private capital aren’t available to invest not only because budget overruns and delays make investors sceptical, but also because of the illiquidity characterising these capital investments. Illiquidity increases the premium to hold debt amid investor concerns about risks, penalising the return on investment. This calls to improve liquidity and transparency through the creation of an exchange for project bonds and pursuing green bonds that value the sustainable development required by law.
The Bottom Line: Aligning Legal Mandates with Economic Realities
In conclusion, while it’s important to have legal frameworks that promote stakeholder inclusion and sustainable development, there’s no escaping the capital costs involved. If neither taxpayers nor businesses are willing to shoulder these expenses, we’re only fooling ourselves to think that more investment in project management will solve the issue. It’s time to find better alignment between laws that amplify stakeholder voices and economic models that acknowledge the value of their claims. Or to rethink our own laws if the state has run out of capacity to tax, borrow, and spend. Otherwise, the only alternative left might be the controversial notion of a “benevolent dictator”—if such a figure could even be found.
