Up and down the country local authorities have been successfully delivering large infrastructure projects for many years and many more projects are being planned for delivery using network north and other capital funds that have been made available recently. The new government will want to see the delivery of vital infrastructure continue to support housing growth, tackle congestion issues and help stimulate the economy. Whilst there is likely to be a spending review ahead of the autumn budget cycle for local authorities one of the considerations should be how the state of public sector finances is likely to impact on the ability of authorities to continue to deliver large infrastructure schemes.
Every politician wants a photo in hi-vis jacket stood on the site of a completed shiny new infrastructure project and preferably with a big sign that says Delivered On Time and On Budget. But we know that rarely happens. Bent Flyvbjerg and Dan Gardner in their book How Big Things Get Done, tell us that 99% of schemes, from their database of over 18,000 major projects from around the world, are delivered over time and over budget. Read the book if you want to know why, but as professional engineers and project managers none of us ever sets out with the intension of overspending or taking twice as long to deliver a project.
A walk through the hallowed halls of the ICE’s library at One Great George Street certainly demonstrates the commitment and efforts professionals put into achieving project delivery with whole sections and hundreds of books on project and risk management.
The fact remains that despite investing in comprehensive feasibility and design work, ground surveys, early contractor involvement, setting up project boards, holding risk workshops, setting up contracts with delay damages and building in large sums of contingency funding into budgets, we still overspend. No matter how much we follow best practice, we are still likely to overspend.
Who holds the risk of overspend and at what point does the risk of cost over runs become stifling to future delivery? Since 2009 local authorities that have held the majority of construction risks for major infrastructure delivery projects. Pre-austerity the DfT operated a major scheme delivery programme and many of us can recall spending hours at Great Marsham House in scheme review meetings pouring over outline and full business cases or explaining cost overruns. Funding of schemes was agreed with DfT and funds released to cover costs as they occurred. Government held the risks until austerity meant that the headlines of overspending on major schemes became too difficult.
Funding for most major schemes now is handed down to local authorities through bidding competitions giving central government more assurance over its funding allocations. A typical scheme will now have multiple funding sources including grants from DfT, but it is down to the local authority to pull these funding sources together to deliver a project and it is local authority budgets that must pay for cost overruns.
Much of our smaller infrastructure improvements are delivered by developers through S278 agreements where the risks are passed onto the developers and their contractors. But some schemes are better delivered by local authorities especially when there are multiple funding sources or tricky traffic management and political issues to be navigated.
We know the landscape of local government finance has changed. Pre-Covid most of us had never heard of S114 but it has quickly become part of our known vocabulary. Eight authorities have now submitted S114’s since 2021, declaring themselves essentially bankrupt, and there are now more than 20 in ‘exceptional financial support’. To put that into context, 14 authorities have issued S114 notices since the Local Government Finance Act 1988 became law, only two prior to Northamptonshire in 2018. These are unprecedented times for local authority spending.
Revenue budgets have been tight for many years, but local authorities have been used to having significant sums of capital funding, reserves and the ability to prudential borrow which has enabled a ‘comfortable’ financial position from which to take on the delivery of major infrastructure. But with so many authorities literally teetering on the edge of financial ruin, at what point does taking on the risk of infrastructure delivery become too risky?
The size of the risk really starts to matter, especially with very large projects, when even a small overspend could dwarf the authority’s annual capital budget. Gloucestershire is currently leading on the delivery of a new motorway junction at an estimated cost of more than £300m, Lincolnshire is aiming to deliver the £133m Grantham southern relief road, Kent is working on the North Thanet Link estimated at £76.7m, North Yorkshire is delivering a £68.8m landslip repairs at Kex Gill, the A34 Lodge Hill Interchange and over £180m of improvements to the A40 corridor are being delivered by Oxfordshire. And these are just a few of the significant infrastructure schemes being delivered by local authorities. Even a small overspend on one of these large schemes could result in a sum larger than their typical annual capital grant settlement from government. Whilst these authorities are undoubtedly working closely with government on covering risks, some of the risk will still rest with the authority and the risks to the authority’s budget position are still significant.
Smaller unitary authorities have always struggled to find ways of delivering large capital schemes but now the financial climate means that even large shire council’s are beginning to think twice about taking on large projects. S151 officers, using every trick in the book to balance their medium-term financial strategies, will most likely be unwilling to contemplate additional capital borrowing when revenue budgets can’t shoulder the interest payments.
As local authorities have used reserves and cut spending to the bone, their flexibility to deal with overspending schemes has become limited. Those authorities not ‘in trouble’ financially, really want to keep it that way and taking on risky major infrastructure schemes will begin to become less attractive or impossible.
Local authority budgets are not likely to improve in the coming years. The independent Institute for Fiscal Studies has warned the next government would have to cut the scope of what the state provides or increase taxes to maintain levels of departmental spending.
So how should any new government address this issue?
Recognize the problem: Firstly, it would be good for DfT to recognize in its funding allocations that scheme cost estimates at bidding stage are likely to be based on feasibility design or study work. Authorities do not have the funding available to invest in detailed design of schemes which do not have allocated funding. There must be some recognition that cost escalations are likely to occur during the detailed design phases and construction budgets are unlikely to be set until later in the process.
Consider underwriting a share of overspends: Acknowledging that scheme overspends happen, DfT could agree as part of the funding award arrangements to cover construction overspends up to a given percentage. This would still enable funding allocation assurance to government but give some encouragement to local authorities by sharing the risk.
Clarity over funding: Local authority should be funding the ‘contingency’ and not the base costs of delivery. DfT could ‘set their funding contribution’ at the point of tender returns so that they agree to pay for the construction of the scheme. The local authority then uses its contribution to cover the contingency and management of the scheme delivery.
Phased Delivery: One way to control risks is to take a ‘phased approach’ setting out what is required in terms of committed funding at each stage of the project. This gives the authority options to reduce the scope or even step away from the project if the funding can’t be found and before committing too much of the authorities funding during the early stages. It also ensures that the authority has a healthy contingency fund built in and secured before the construction phases begin. An approach like this could be formalised by DfT as a way of recognising the risks local authorities are being asked to shoulder.
A number of authorities around the country have already started to shelve or defer major schemes. Fast action is needed to secure the ability to deliver major infrastructure during these difficult financial times.
Scott Tompkins
CIHT Fellow
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