Modelling economic risks in megaproject construction: a systemic approach

Megaprojects present significant economic risks to their financiers and sponsors. Factors such as inflation, cash flow issues, material and energy price hikes and change in government policies can cause such capital intensive projects to overrun planned budget and schedule allocations. Where the project is a commercial asset, delayed completion time and cost overruns usually have significant impact on the profitability of the project as well as the estimated returns on investment over the operational phase of the project. Understanding the dynamics of specific risks can thus be very crucial in designing containment measures to deal with their likely impact on the project. Using a case-study of the Edinburgh Trams project in Scotland, the dynamics of identified economic risks in transportation megaprojects is presented. Through the combination of interviews, questionnaires and non-participant observation, different economic risk factors were first identified. The identified factors were then prioritised using Analytical Network Process (ANP) to establish the most salient economic variables on the Tram project. Some of these factors include material and energy price increases as a result of the 2008 recession, as well as inflation and changes in government funding policies. The selected factors from the ANP were then modelled within a System Dynamics (SD) framework to appraise their measured economic impact on the project to gain a fuller understanding of the interrelationships between the variables in the system. The mean impact of economic risks on Edinburgh Trams was estimated to be about 22%.