Mega expectations

Late, expensive, disruptive - mega projects don't have a great reputation. Done right, however, they can increase supply security, lower costs and revamp business processes, says Tim Waterfield

Mega projects do not generally get a good reception. With a reputation for overrunning and vastly exceeding anticipated budgets, it is no wonder the European Co-operation in Science and Technology (Cost) framework has set up a series of working groups to explore the effective design and delivery of mega projects in the European Union. Often blamed for displacing communities and being prone to corruption, some of the largest energy and infrastructure projects in the world have a questionable past.

In addition, the general public do not always see the long-term benefits of a project as worth the short-term pain. You only have to look at the continuing controversy surrounding the proposed high speed rail link (HS2) to understand that big projects provoke heightened emotions. Research by Independent Project Analysis Institute (IPA) suggests that many of the large, complex capital projects carried out in the past 20 years – such as large-scale power plants or offshore platforms – have been unsuccessful or suffered cost overruns.

However, it is not all bad news, because consultants and mega project experts increasingly learn from the projects that have gone before. Additionally, the energy industry has shown that by moving from medium or big to mega projects, economies of scale can be achieved and costs reduced.

There is no doubt that mega projects will dominate the construction required to meet the UK’s future energy needs and, as experience in handling such projects matures, the benefits of taking on the challenge of these developments will start to significantly outweigh disadvantages.

For example, think mega and the risks are spread further. They can support more efficient contracting, more cost-effective surveys, greater appetite for optimising and investing in supply chains, lower installation costs and a greater incentive to develop the next generation of technology. Ultimately, by taking a mega projects approach, the operating costs may go down while the output per unit of investment grows.

Of course, the successful delivery of a mega project requires the integration of expertise from many disciplines and the effective management of numerous interrelated variables. This can be on a local, national or even global scale. Let us take, for example, an offshore wind project in the UK. The investment phase might take nine or ten years between first discussions through to hand-off to the operator. Most of this time will be spent on planning consultations and obtaining consents – perhaps engaging with hundreds if not thousands of stakeholders. The time required to manufacture the turbines must also be taken into account (whether in the UK or abroad) and the logistical infrastructure required for delivery and installation, as well as the onshore connection requirement. The challenges soon stack up.

The devil, as always, is in the detail, and for a mega project to be successful a strategic and cohesive, co-ordinated approach is essential. As the expertise available to steer these projects has developed, so has the sophistication of opposition groups and objectors.

There are a few key areas on which to focus, but critical are the people involved and the project management process they employ. For example, an experienced negotiation team with people skills, an in-depth knowledge of local rural property, a strongly-backed-up understanding of land values and the respect of the other stakeholders can go a long way in securing the support of landowners who may need to sell-up and relocate for the project to proceed.

Indeed, good project management combined with conciliatory rapport-building can negate – or at least minimise – the need for aggressive compulsory purchases. This kind of proactive approach to engagement can deliver both time and cost benefits, avoiding costly wrangles and helping to minimise lengthy and expensive delays that can eat up project man hours and resources.

In addition, it is important to develop a clear but flexible project strategy which allows sufficient time and budget for negotiation. Good communication between stakeholders is essential, with engineers, environmentalists, lawyers, land agents, local authorities, investors, developers and operators all warranting a place at the decision-making table. This is even more significant when the eventual operator might not be investing in or developing the site. Retrofitting operator-required changes to the finished plant can often be more expensive than building them into the project scope in the first place.

Of course, with operators often lacking sufficient funds to invest, the role of the third party investor is ever more important. The Energy Bill, which has just gone through the Public Bill Committee, has not, as yet, delivered the impact which the industry hoped-for in terms of inspiring investor confidence. There are still a lot of unanswered questions and, consequently, a significant perceived level of risk for organisations looking to invest.

Ultimately, however, invest we must. The most effective way of doing this is to develop and deploy different energy technologies in tandem. The first steps will take in the improved efficiency of coal and gas-fired generation – oil will also remain important. The anticipated role of nuclear power has been scaled back but hydropower, wind and solar are all seeing growth. In the longer term, carbon capture and storage (CCS) is crucial. CCS is, at the moment, the only technology that would allow heavy industry to meet emissions reduction goals.

One of the biggest challenges for CCS, and indeed any energy mega project, lies in the need for space in the right place. It is often forgotten but land in the UK is a more limited resource than coal, gas or oil. Therefore, each potential mega project site must balance commercial, logistical and regulatory factors while also taking into account the views and influence of the stakeholders in the local vicinity.

Mega projects are always challenging, complex and expensive. But, with the right people on board and knowledge gleaned from past experience, the opportunity to deliver capacity and efficiency to the global energy market is phenomenal. By thinking “mega”, investors, developers and operators can introduce changes in supply chains, business models, processes and practices which will, ultimately, lead to lower development and operating costs and greater revenues.

If the energy sector cannot bring on board the right skilled experts and sufficient investment at an early stage and in a predictable and stable environment, then these much-needed projects will just not be built.

Tim Waterfield is a director of Savills Strategic Projects, which specialises in the delivery of major infrastructure development projects

This article first appeared in Utility Week’s print edition of 22nd February 2013.

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