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Coronavirus: A Game Changer for Project Delivery? (Ika et.al)

By

June 1, 2020

Coronavirus: A Game Changer for Project Delivery? (Ika et.al)

By Lavagnon Ika, Peter E.D. Love, Jane Matthews, and Weili Fang

Coronavirus: A Game Changer for Project Delivery?
by
Lavagnon Ika, Peter E.D. Love, Jane Matthews, and Weili Fang

Lavagnon Ika is a professor of project management at the Telfer School of Management of the University of Ottawa in Canada. Email: Ika@telfer.uottawa.ca Twitter: @Lavagnon

Peter E.D. Love is a professor of infrastructure and engineering informatics at the School of Civil and Mechanical Engineering of Curtin University, Australia. E-mail: p.love@curtin.edu.au

Jane Matthews is a professor of digital construction at the School of Architecture and Built Environment, Deakin University, Geelong Waterfront, Australia. E-mail: jane.matthews@deakin.edu.au

Weili Fang is a research associate at the School of Civil and Mechanical Engineering, Curtin University, Australia. Email: weili.fang@curtin.edu.au

The global outlook for the Coronavirus Disease 2019 (COVID-19) is gloomy. That is not the case for project-based work, which experiences a boom. For example, according to the World Bank, some $ 20 trillion or about one-fourth of the world GDP is spent every year through projects. Up to tens of trillions of dollars of investment in infrastructure projects is needed worldwide to achieve the United Nations’ development goals by 2030. The coronavirus outbreak will not change this heavy trend but it will significantly disrupt the way organizations deal with their projects, particularly the large-scale ones.

In the face of the pandemic, the global response measures taken by governments throughout the world have been significant. To name but a few, the United States (US) federal government stimulus package amounts to a staggering $2 trillion and the European Union rescue package is no less than €500 billion, while the European Central Bank has pledged for a staggering €1.5 trillion. These stimulus measures, which seek to cushion the economic blow of the coronavirus outbreak on businesses and individuals, include billions for public transport infrastructure projects. At the same time, governments are ramping up essential construction projects such as hospitals and upgrades and COVID-19 assessment centres. Remarkably, we have seen the private and public sectors join their forces in this unprecedented time to address the economic and social challenges that have been thrust upon society. In the wake of the coronavirus outbreak and its economic and fiscal fallout, things will be different when it comes to the delivery of large-scale infrastructure projects.

In advance of the COVID-19 global pandemic, we already know that projects often do not come in on time and within budget. Worse still, if they are not cancelled, projects fail to deliver on their immediate objectives or their strategic goals, much to the disappointment of their stakeholders. The 2019 Project Management Institute Pulse of the Profession® reports that a dismal 12% of the investment made in projects was wasted last year due to their poor performance. This statistic has remained steady for the previous five years or so. Project misperformance is a worrisome and pervasive challenge. However, with the COVID-19 outbreak, things will get worse before they get better.

COVID-19’s impact on projects: Delays, cost increases, and bankruptcies
Throughout the world, a vast number of large-scale transport infrastructure projects need to be constructed and are in progress. In the US and Canada, for example, whether construction work is designated an “essential service” or not, several projects have been halted or delayed, as a result of the pandemic. A case in point is the North Carolina Department of Transportation, which has postponed 93 projects worth $2 billion for its coming budget year. In Washington State, a similar scenario occurs as work on 92 of its 100 highway projects has stopped due to the lockdown.

What is more, many ongoing projects are experiencing delays due to lower levels of productivity, as a result of on-site social distancing measures. The Toronto’s $ 5.3 billion and 19-kilometre Eglinton Crosstown Light Rail Transit system, which will now run past its September 2021 completion date, is a pertinent example. Numerous projects are also experiencing unprecedented supply chain challenges as raw materials and components need to be sourced from overseas markets such as structural steel from Asia. Stopping projects will no doubt result in subcontractors experiencing bankruptcies as their cashflow suffers. As staff is laid-off or furloughed, there will also be a prololonged period of reduced capacity, which will impact an economy’s ability to grow.

COVID-19 may disrupt project delivery even more in the long run
In the aftermath of COVID-19, the way large-scale infrastructure projects are procured and managed may need change to be able to adapt and respond to externalities. In doing so, issues surrounding project finance and ensuring shared value immediately come to light.

Project finance is at risk
In a world post-COVID-19, projects will be complex and uncertain. In particular, project finance will be significantly disrupted. Both governments and industry will face an uphill challenge sourcing project finance, despite interest rates being at an all-time low. While there would be money from the stimulus packages, lessons from history and notably the 2008 global crisis remain clear: Many projects now at their planning stage will be abandoned.

Back to 2010, despite the recurring and frustrating delays for commuters in New Jersey, Governor Christie presumably cancelled the $9-billion-plus Trans Hudson Passenger Rail Tunnel (Access to the Regions Core) project that would connect Secaucus Junction in New Jersey and Manhattan in New York City. The $28.5 billion Greater Toronto Area Extension Program, which includes the Ontario Line, Yonge North Subway Extension, Scarborough Subway Extension, and Eglinton West LRT, faces a similar fate. Undeniably, some of these projects will be put on hold for financial reasons. More creative solutions for project finance will emerge and may include governments providing up-front equity with the private sector sourcing capital from commercial banks, institutional investors, multilateral agencies and the like.

Project procurement may not be the same: a shift from lowest price to shared value creation
In the case of projects in their planning stage such as the $28.5 billion Greater Toronto Area Extension Program, Tier one contractors’ may be disinterested in preparing an expression of interest to submit a bid due to the high level of financial risk in these uncertain times. Even before the pandemic, the global supply chain has been running on low prices and thin margins. Consequently, Tier one contractors responsible for the design and construction of large-scale transport projects were struggling to make a profit. Notably, the costs of bidding are significant, ranging from 3% to 5% of a project’s value and if unsuccessful in a competitive bidding environment, the associated financial loss can adversely impact the whole business’ bottom-line. Evidence indicates that the winning bid does not always deliver value for money. This is the case of the Honolulu Rail Transit System, which has experienced long delays, huge cost increases, and lots of quality issues. There is a need to shy away from competitive bidding post COVID-19 and engage with shared value creation.

Stakeholders in projects invariably hold differing if not conflicting expectations and work under diverse institutional rules. In the wake of COVID-19, the temptation to reduce complexity and uncertainty would understandably be high but would unequivocally result in poor project performance. Instead, an attitude towards embracing complexity and uncertainty is needed. Governments should shift their mindsets from relying on free-maket capitalism to select the lowest price to one where economic value is created and societal and environmental benefits can be realized through a process of negotiation.

Governments therefore need to work collaboratively with the private sector to generate such value and benefits. To this end, project risks should be shared and creativity and innovation pushed to construct and future-proof large-scale infrastructure assets. In that sense, we see the coronavirus pandemic as a game changer for project delivery.