Expect cost overruns on Mactaquac dam, says Oxford researcher

Huge dam projects have a history of "staggering" cost overruns, says Alex Budzier, an Oxford University specialist in major projects.

Budzier, a fellow in management practices at Oxford's Saïd Business School, had a tip for New Brunswickers on Thursday on the heels of this week's announcement on the future of the Mactaquac dam: manage your expectations.

NB Power announced its intention to maintain the dam — the lifespan of which has been abbreviated by an alkali-aggregate chemical reaction in its concrete — until 2068.

The estimated cost of keeping the station going is between $2.9 billion and $3.6 billion.

Budzier said that with projects costing more than $1 billion, "no matter where we look, they were over budget, incurred large delays, and didn't achieve the benefits they were supposed to."

And the problems developed no matter what the project, whether "dams, transport infrastructure, big technology projects, mega-events, nuclear power, or defence acquisition."

Budzier's research on the challenges of managing mega-projects — whether in IT, hard and soft infrastructure, energy, or mega-events — indicates the track record isn't particularly good, regardless of industry.

'That is a big deal'

Energy projects regularly come with a price tag as much as double the initial cost.

In the case of dam projects, "we see that in seven out of 10 projects, there were cost overruns of a staggering 90 per cent," Budzier said. "That is a big deal."

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Nuclear power projects are worse.

"A bit more than nine out of 10 — or almost 10 out of 10" nuclear power plant projects, he said "run over budget and are almost never built to the initial costs."

But that's better than some mega-events: "not a single Olympics has ever been built to budget," he said.

1 job = $100,000

Not all experts take such a pessimistic view.

Fred Bergman, a senior policy analyst with the Atlantic Provinces Economic Council, said creating a single position typically comes with a cost of $100,000..

"You have to spend a million dollars just to create 5.2 jobs in this province — that's within New Brunswick only, not including spin-offs or direct jobs in other provinces due to imports," Bergman said in an interview with Information Morning Fredericton.

"It's not just the cost of the wage, it's all the overhead: the rent, the light, the taxes, the office costs. That's not out of the norm."

Construction projects have even bigger costs, he said.

Bergman estimated the Mactaquac dam project would create 300 jobs during the construction phase, but even that might not perceptibly boost New Brunswick's economic ranking.

"It's spread out over 13 years, so the impact in any one year might be small," he said. "But the cumulative impact is large."

"When you're looking at measurements like GDP," he said, "you have to have a pretty big splash in the pond before you start to see any economic ripple."

'Natural optimism' part of pattern

The pattern of cost overruns in mega-projects, is due in part, Budzier said, to the "natural optimism" of the players.

"Engineers and politicians like to portray a project as being extremely beneficial," he said, "and contractors like to win contracts to work on these projects."

When everybody at the bargaining table has a "huge incentive" to portray costs as "as low and as risk-free as possible, while overstating the benefits," Budzier said, blown budgets are the result.

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But ultimately, "somebody needs to repay all the debts that are being taken on to finance that sort of project," Budzier said.

"There needs to be a senior leadership commitment, not only when it's being announced, but throughout its whole life cycle."

That way, governments can steer clear of building assets that "create a burden on the economy, rather than helping in the way that they're supposed to," he said.

Players must 'have skin in the game'

When major projects are successfully built to the original cost, Budzier said, it is usually when owner-operators, governments and public society ensure that mechanisms for external scrutiny, including independent audits and review boards, are in place.

"If these is not independent scrutiny, then how can you have skin in the game?" Budzier asked.

"If everyone at the table really wants to do something, they are happily ignorant of all the risk they may be taking on."

"When people that are not part of the project or the department independently scrutinize cost estimates, that leads to a better sense of realism."