VGI0006
Written evidence submitted by The Productivity Institute
Professor Graham M Winch, The University of Manchester
Major programmes transform our economy and society, but they only do this if the value opportunities created by the asset delivered by the programme are seized by those best placed to do so. Our focus in this submission is on social and economic infrastructure programmes, and so we formulate value opportunities as infrastructure services (Luger, Butler, & Winch, 2013) provided by the successful operation of infrastructure assets to deliver infrastructure services to customers, be they citizens or organizations. Such services include transporting, commuting, communicating, sheltering, powering and so on. We will argue 1) that the seizing of value opportunities relies upon capable asset developers that integrate value realization into project shaping with a full understanding of how infrastructure services are provided for customers and 2) that a weakness in the UK institutional landscape is the lack of an infrastructure delivery agency that can act as a default capable asset developer to assure successful delivery of infrastructure assets and ensure that value opportunities are effectively seized through the provision of infrastructure services.
Asset owners are the developers and operators of infrastructure assets with the business purpose of providing infrastructure services to customers. Figure 1 presents a generic business model for asset owners (Winch, Maytorena-Sanchez, & Sergeeva, 2022). Whether the owner is in the public sector (e.g. an NHS trust); a government-owned company (e.g. Network Rail), a regulated utility (e.g. Anglian Water); or a private sector entity (e.g. BP plc) the generic model applies. The principal variants are 1) whether the funding stream is provided directly through sales (e.g. tolls) or indirectly by taxpayers when the service is free to customers at the point of use and 2) whether project financing is used (i.e. loans secured on the asset) or finance is from internal resources be they shareholders or taxpayers. It shows how infrastructure asset owners are accountable for raising finance, enabling and overseeing project shaping and delivery by suppliers (consultants and contractors), and then realizing benefits which generate a funding stream to repay the finance. They do this by procuring suppliers to deliver the asset and providing that asset to customers of various kinds. In other words, they own the business case across all 5 dimensions (HMT, 2020). Unless this asset owner entity is capable, there is little hope of either delivering the asset as planned or achieving the benefits expected.
Research under the auspices of Project 13[1] used focus groups including representatives of many of the regulated utilities as well as government organizations such as the Environment Agency and National Highways. This research confirmed the importance of what we dubbed the voice of operations within the owner project team responsible for project shaping, but also identified the crucial importance of the voice of the customer as the consumer of infrastructure services (ICE, 2020; Maytorena-Sanchez & Winch, 2022). This UK research is strongly supported by international benchmarking studies from the US-based Independent Project Analysis which shows the importance of an asset owner’s “integrated project team" that includes the voice of operations (Merrow, 2011, 2023) during the project shaping phase prior to final investment decision.
Figure 1: Infrastructure Asset Owner Generic Business Model (Source: Winch et al, 2022: Figure 5.1).
The Voice of Operations is required to ensure that decisions made during project shaping pay attention to the need to operate efficiently and effectively through asset life. Questions such as can the asset be maintained efficiently with minimal disruption to customers and hence funding streams; are potential asset enhancements safeguarded within the project scope; how can operational carbon targets be assured need to be answered during project shaping, not following project delivery. In other words, the voice of operations is required to ensure the maximum feasible asset uptime at the optimal level of efficiency. Without asset availability, value from government investment programmes cannot be realized.
The Voice of the Customer is required to answer the basic question, “will they come”? They did not come in the case, for instance, of the Humber Bridge and Millennium Dome. Subsequent actions have, therefore, had to be focused on minimizing value degradation rather than value enhancement. More broadly, the voice of the customer goes to the heart of the delivery of public services either by public entities or regulated utilities. In situations where full value from the provision of infrastructure services requires collaboration with other public entities such as local authorities, their stakeholder voice needs to be included in the Voice of the Customer.
Our recommendation therefore is that the Senior Responsible Owner (SRO) for the programme be mandated with identifying who within the owner project team during Appraise and Select leading to Outline Business Case is responsible for articulating the Voice of Operations and the Voice of the Customer.
There is now considerable evidence that asset owner project capability is an essential factor in successful major project delivery. Extensive benchmarking data (Merrow, 2011, 2023) provides the general evidence-base, including the importance of not relying on external suppliers for key project and engineering skills but having them in-house to the project owner. There is also evidence that the UK public sector has a specific problem in this respect. The Infrastructure Cost Review (HMT, 2010) concluded, inter alia, that
There is a high level of consensus from the interviews that clients in the UK tend to have less in-house technical capability than in other countries and are consequently less able to lead, discuss, challenge or interrogate designs whether in technical or aesthetic terms (HMT, 2010: 26).
A series of NAO reports on HS2 (NAO, 2013, 2016, 2020) noted the challenges faces by both the Department for Transport as project sponsor and HS2 Ltd as project owner in developing their capability to manage the project. For instance, it reported that “HS2 Ltd is building its capability at the same time as starting to deliver the programme” (NAO, 2016:6).
When looking at the UK institutional landscape for infrastructure asset development comparatively, there is a notable gap. Many countries have some kind of infrastructure delivery agency. These include the US Army Corps of Engineers, Rijkswaterstaat in The Netherlands, and the French Directions d’Equipement. Such bodies may or may not go on to operate the asset to realize value. For instance, USACE is the largest provider of hydroelectric power in the USA, while Rijkwaterstaat often supports other infrastructure asset owners.
While these three are all over 200 years old, Denmark provides a newer example. Sund & Bælt Holding A/S was founded in 1991 as the 100% state-owned project owner and operator for the Danish half of the Øresund Bridge to Sweden. It took over at its foundation the state-owned special purpose vehicle Storebæltforbindelsen A/S which was the owner and operator of the Storebælt link from Zealand to Funen. It is now the Danish owner and operator of the Femern Link to Germany which is presently under construction. It recycles the toll income from its operational road/rail links to finance the development of new links such as Femern, as well as borrowing from the private sector backed by state guarantees. It has also received EU financing. It is currently undertaking feasibility studies for a proposed link across the Kattegat from northern Zealand to Jutland and an eastern ring road for Copenhagen, amongst other infrastructure projects. This long-term programme has allowed Sund & Bælt to plan on keeping its concrete prefabrication factory at Rødbyhavn open to be ready for the construction of future infrastructure projects. Sund & Bælt also provides tolling service for itself and other infrastructure operators. It also provides consultancy services internationally, particularly focused on international fixed links. It works closely with external consultants and contractors, but provides a stable, core owner capability for Danish infrastructure. In contrast, in the UK megaprojects such as these would be treated as separate entities each having to relearn the same lessons from scratch.
The proposal is, therefore, that a national Infrastructure Delivery Agency to complement the strategic role of the National Infrastructure Commission and the governance role of the Infrastructure and Projects Authority be established. This would provide a core asset owner capability for shaping and delivering UK infrastructure developments and ensuring the realization of value from the provision of infrastructure services. Such an agency could:
1) Support early phase shaping of asset development projects to ensure that project delivery and value realization considerations are taken into account from the very start prior to the depositing of a hybrid bill or application for development consent.
2) Support the start-up of stand-alone arms lengths asset owner bodies such as HS2 Ltd to enable more rapid mobilization and maturation of project owner capabilities.
3) Clarify the role of the Infrastructure and Projects Authority as focused on project governance by sponsoring government departments and support for SROs within government.
4) Carry out the P-Rep role on behalf of sponsoring government departments which is presently outsourced to consultancies.
5) Act as a knowledge-base of best and advanced practice for the required technical, project, commercial capabilities for major projects, and thereby enhancing career development in the sector.
6) Provide a consistent commercial counterpart for project delivery partners such as Crossrail Ltd which are typically mobilized as asset development projects move from the shaping to the delivery phases.
7) Collect, hold and analyse project outturn data to enable the improvement of early phase estimating for major projects based on rigorous benchmarking.
8) Hold a centralized data base on supplier delivery performance.
9) Ensuring engagement with stakeholder partners in value realization such as local authorities, complementary infrastructure asset owners, and the private sector in situations where there is not a default capable asset owner and operator.
5.Summary
According to the Second National Infrastructure Assessment, the UK faces a new age of infrastructure investment and yet little strategic thought is presently being afforded to how this investment will be shaped and delivered to achieve the benefits to which we all aspire. Across sectors such as water, electricity transmission, and transportation we need to do much better at delivering the infrastructure assets we need to the schedule and budgets set at Final Investment Decision/ Full Business Case. There has been significant innovation in the institutional landscape for UK infrastructure investment since 2011 with the strategically focused National Infrastructure Commission and the governance-focused Infrastructure and Projects Authority. We believe that we now need a complementary infrastructure delivery body. Our proposal is one way to enhance that essential asset owner project capability to ensure that value realization through the consummate provision of infrastructure services becomes the norm in the UK.
6. Who we are
The Productivity Institute (TPI) is UK-wide research organisation exploring what productivity means for business, for workers and for communities funded by the ESRC focused on the UK’s “productivity problem”. Within that programme attention is paid to the chronically low productivity performance of the construction sector which is central to achieving our ambitions for net zero. Two complementary streams of research on construction focus on modern methods of construction for housing and infrastructure development. This submission draws on that latter stream.
Graham M. Winch is Professor of Project Management at Alliance Manchester Business School. He has run construction projects and researched various aspects of innovation and project management across a wide variety of engineering sectors. He was formerly Academic Director for Executive Education at AMBS, including accountability for project leadership programmes such as Managing Projects for BP, and Leading Complex Projects Programmes and Portfolios programme for BAE Systems. He is author of Managing Construction Projects (Wiley-Blackwell, 2010), co-author of Strategic Project Organizing (OUP, 2022), and co-editor on Research Handbook of Complex Project Organizing (Edward Elgar, 2023). He has published over 60 refereed journal articles, complemented by numerous book chapters, conference papers, and research reports.
Graham and the TPI would be very pleased to enter into further discussions with the Committee of Public Accounts on and around the content of this submission if so desired by the Committee.
7. References
HMT. (2010). Infrastructure Cost Review: Main Report. London: HM Treasury.
HMT. (2020). The Green Book: Central Government Guidance on Appraisal and Evaluation. London: HM Treasury.
ICE. (2020). A Systems Approach to Infrastructure Delivery. London: Institution of Civil Engineers.
Luger, M., Butler, J., & Winch, G. M. (2013). Infrastructure and Manufacturing: Their Evolving Relationship. London: Government Office for Science.
Maytorena-Sanchez, E., & Winch, G. M. (2022). Engaged scholarship in project organizing research: The case of UK infrastructure. Project Leadership and Society, 3, 100049.
Merrow, E. W. (2011). Industrial megaprojects: concepts, strategies, and practices for success. Hoboken, N.J.: Wiley.
Merrow, E. W. (2023). Contract Strategies for Major Projects: Mastering the Most Difficult Element of Project Management. Hoboken, NJ: Wiley.
NAO. (2013). High Speed 2: A Review of Early Programme Preparation. London: National Audit Office.
NAO. (2016). Progress with Preparations for High Speed Two. London: National Audit Office.
NAO. (2020). High Speed 2: A Progress Update. London: National Audit Office.
Winch, G. M., Maytorena-Sanchez, E., & Sergeeva, N. (2022). Strategic Project Organizing. Oxford: Oxford University Press.
March 2024
[1] Project 13 was initiated by the Infrastructure Clients Group and is now run under the auspices of the Institutional of Civil Engineers https://www.project13.info/